Cougar Builders Ltd. takes on both short- and long-term contracts. For short-term contracts (nine months or less), it recognizes expenses as they are incurred and revenue when the contract is complete, unless the contract is not complete by year end. When the contract spans two accounting periods, it uses the percentage of completion method for that contract. For long-term contracts (over nine months), it uses the percentage of completion method. It recently agreed to do two contracts. On June 30, 2011, the company agreed to a six-month contract to replace the bricks on the outside of an apartment building. The contract was for $650,000 and the company expected to incur costs of $480,000. The contract was completed by December 20, 2011, and had actual costs of $510,000.
The second contract was for the construction of a new apartment complex for $5,620,000. The contract was signed on August 1, 2011, and was expected to be finished by September 30, 2012. The expected costs for the contract are as follows:
Year Cost
2011………………………$1,408,075
2012……………………… 2,676,985
Total………………………$4,085,060
Cougar Builders closes its books every December 31. Required:
a. For each of the two contracts, determine the revenue, expense, and profit (loss) as at December 31, 2011.
b. Explain why the accounting method chosen for the two types of contracts is appropriate for Cougar Builders.