Question:
Citation Builders, Inc., builds office buildings and single-family homes. The office buildings are
constructed under contract with reputable buyers. The homes are constructed in developments ranging
from 10–20 homes and are typically sold during construction or soon after. To secure the home upon
completion, buyers must pay
a deposit of 10% of the price of the home with the remaining balance due upon completion of the house
and transfer of title. Failure to pay the full amount results in forfeiture of the down payment.
Occasionally, homes remain unsold for as long as three months after construction. In these situations,
sales price reductions are used to promote the sale.
During 2013, Citation began construction of an office building for Altamont Corporation. The total
contract price is $20 million. Costs incurred, estimated costs to complete at year-end, billings, and cash
collections for the life of the contract are as follows:
Also during 2013, Citation began a development consisting of 12 identical homes. Citation estimated that
each home will sell for $600,000, but individual sales prices are negotiated with buyers. Deposits were
received
for eight of the homes, three of which were completed during 2013 and paid for in full for $600,000 each
by the buyers. The completed homes cost $450,000 each to construct. The construction costs incurred
during 2013 for the nine uncompleted homes totaled $2,700,000.
Required:
1. Briefly explain the difference between the percentage-of-completion and the completed contract
methods of accounting for long-term construction contracts.
, 2. Answer the following questions assuming that Citation uses the completed contract method for its
office building contracts:
a. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2013 and
2014?
b. How much revenue related to this contract will Citation report in its 2013 and 2014 income statements?
c. What will Citation report in its December 31, 2013, balance sheet related to this contract (ignore cash)?
3. Answer requirements 2a through 2c assuming that Citation uses the percentage-of-completion method
for its office building contracts.
4. Assume that as of year-end 2014 the estimated cost to complete the office building is $9,000,000 and
that
Citation uses the percentage-of-completion method.
a. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2014?
b. How much revenue related to this contract will Citation report in the 2014 income statement?
c. What will Citation report in its 2014 balance sheet related to this contract (ignore cash)?
5. When should Citation recognize revenue for the sale of its single-family homes?
6. What will Citation report in its 2013 income statement and 2013 balance sheet related to the single-
family home business (ignore cash in the balance sheet)?
Answer:
Requirement 1
The completed contract method of recognizing revenues and costs on long-term construction contracts is
equivalent to recognizing revenue at the point of delivery, that is, when the construction project is
complete. The percentage-of-completion method assigns a share of the project’s expected revenues and
costs to each period in which the earnings process takes place, that is, the construction period. The share
Citation Builders, Inc., builds office buildings and single-family homes. The office buildings are
constructed under contract with reputable buyers. The homes are constructed in developments ranging
from 10–20 homes and are typically sold during construction or soon after. To secure the home upon
completion, buyers must pay
a deposit of 10% of the price of the home with the remaining balance due upon completion of the house
and transfer of title. Failure to pay the full amount results in forfeiture of the down payment.
Occasionally, homes remain unsold for as long as three months after construction. In these situations,
sales price reductions are used to promote the sale.
During 2013, Citation began construction of an office building for Altamont Corporation. The total
contract price is $20 million. Costs incurred, estimated costs to complete at year-end, billings, and cash
collections for the life of the contract are as follows:
Also during 2013, Citation began a development consisting of 12 identical homes. Citation estimated that
each home will sell for $600,000, but individual sales prices are negotiated with buyers. Deposits were
received
for eight of the homes, three of which were completed during 2013 and paid for in full for $600,000 each
by the buyers. The completed homes cost $450,000 each to construct. The construction costs incurred
during 2013 for the nine uncompleted homes totaled $2,700,000.
Required:
1. Briefly explain the difference between the percentage-of-completion and the completed contract
methods of accounting for long-term construction contracts.
, 2. Answer the following questions assuming that Citation uses the completed contract method for its
office building contracts:
a. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2013 and
2014?
b. How much revenue related to this contract will Citation report in its 2013 and 2014 income statements?
c. What will Citation report in its December 31, 2013, balance sheet related to this contract (ignore cash)?
3. Answer requirements 2a through 2c assuming that Citation uses the percentage-of-completion method
for its office building contracts.
4. Assume that as of year-end 2014 the estimated cost to complete the office building is $9,000,000 and
that
Citation uses the percentage-of-completion method.
a. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2014?
b. How much revenue related to this contract will Citation report in the 2014 income statement?
c. What will Citation report in its 2014 balance sheet related to this contract (ignore cash)?
5. When should Citation recognize revenue for the sale of its single-family homes?
6. What will Citation report in its 2013 income statement and 2013 balance sheet related to the single-
family home business (ignore cash in the balance sheet)?
Answer:
Requirement 1
The completed contract method of recognizing revenues and costs on long-term construction contracts is
equivalent to recognizing revenue at the point of delivery, that is, when the construction project is
complete. The percentage-of-completion method assigns a share of the project’s expected revenues and
costs to each period in which the earnings process takes place, that is, the construction period. The share
