Gifford Construction Corporation Has Entered into a Long-Term Fixed Contract

question 36

Essay

Gifford Construction Corporation has entered into a long-term fixed contract to build a performing arts center for Philbin University.The fixed price is $71,500,000.The costs,estimated costs,and billing activity for the three years of the contract are shown below:
$\begin{array}{llrr}&201&2014&2015\\\text { Construction costs incurred to date } & 20,000,000 & 45,000,000 & 70,000,000 \\\text { Estimated future costs } & 35,000,000 & 30,000,000 & 0 \\\text { Billings to date } & 24,700,000 & 43,758,000 & 71,500,000 \\\text { Cash collections to date } & 20,995,000 & 41,570,100 & 71,500,000\end{array}$
Required:
a.Compute the gross profit to be recognized under the percentage-of-completion method on Gifford's income statements for each year under the contract.
b.Compute construction in progress net of billings under the percentage-of-completion method at the end of 2013 and 2014.Be sure to indicate whether the balance is classified as an asset or liability.
c.Compute the gross profit to be recognized under the completed contract method on Gifford's income statements for each year under the contract.
d.Which method is more conservative:the percentage-of-completion method or the completed contract method? Explain.

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Definitions:

Direct Materials

Raw materials that directly become a part of the finished product and can be easily traced to it.

Standard Cost

A predetermined cost of manufacturing a single unit or a number of product units during a specific period under current or anticipated operating conditions.

Direct Labor Variances

The differences between the actual costs of direct labor and the standard or expected costs, used for budgeting and cost control.

Direct Labor Workers

Employees who are directly involved in the production of goods or services.