FA5 Problem:Long Term Contracts – Percentage of Completion - Big ConstructionCompany

FA5 Problem:Long Term Contracts – Percentage of Completion - Big ConstructionCompany

Big Construction Company (“BGC”) entered into a contract with the provincial government toconstruct a hospital. At the time of the contract it was estimated that it would take 3 years tocomplete the facility at a cost of $ 6,580,000. The contract was priced at $7,200,000. During thefirst year, BGC incurred $2,171,400 in construction costs related to the project and the estimatedcost of completion was $ 4,408,600. In the second year, construction costs of $ 2,603,000 wereincurred and estimated cost of completion was $ 2,685,600. In Year 3 the company incurred$1,525,600 to complete the project.

Required:

1.

Calculate the profit to be recognized in each year (year 1, 2 and 3) under the percentageof completion method.2.

If the company uses the completed contract method how much profit would berecognized at the end of year 1?3.

If the cost of project could not be reasonably estimated at the beginning of the projectwhat method of accounting should BGC use?