Revenue Recognition Methods

Revenue Recognition Methods—Comparison) Sue’s Construction is in its fourth year of business. Sue performs long-term construction projects and accounts for them using the completed-contract method. Sue built an apartment building at a price of $1,100,000. The costs and billings for this contract for the first three years are as follows.

2012 2013 2014
Costs incurred to date $240,000 $600,000 $ 790,000
Estimated costs yet to be incurred 560,000 200,000 –0–
Customer billings to date 150,000 410,000 1,100,000
Collection of billings to date 120,000 340,000 950,000

Sue has contacted you, a certified public accountant, about the following concern. She would like to attract some investors, but she believes that in order to recognize revenue she must first “deliver” the product. Therefore, on her balance sheet, she did not recognize any gross profits from the above contract until 2014, when she recognized the entire $310,000. That looked good for 2014, but the preceding years looked grim by comparison. She wants to know about an alternative to this completed-contract revenue recognition.

Instructions

Draft a letter to Sue, telling her about the percentage-of-completion method of recognizing revenue. Compare it to the completed-contract method. Explain the idea behind the percentage-of-completion method. In addition, illustrate how much revenue she could have recognized in 2012, 2013, and 2014 if she had used this method.

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