On December 31, 20x0, Raccoon Construction entered into a major long-term construction project with the following terms:

Total contract price $3,000,000

Total expected cost $2,400,000

Construction takes place over three years. Production costs and cash flows are shown in the following table:

Year Costs Incurred Cash Received

20x1 $900,000 $1,000,000

20x2 800,000 1,000,000

20x3 700,000 1,000,000

Totals $2,400,000 $3,000,000

1. Show the revenue and pretax income for each year under both the percentage-of-completion and completed contract methods.
2. Assuming this contract is the only activity undertaken by the company, show the balance sheet accounts at December 31, 20x1 resulting from the contract under the (i) percentage-of-completion method, and (ii) completed contract method.
3. Assume that total projected costs increase by $100,000 and the change in estimate is made at December 31, 20x2. Compute the revenue and pretax income for 20x2 under the revised assumption.
4. Now assume that that total projected costs increase by $700,000 and the change in estimate is made at December 31, 20x2. Compute the pretax income for 20x2 under the revised assumption.

Answer rating: 100% (QA)

The Completed Contract method is an accounting technique that allows Companies to postpone the repor... View the full answer