Clarence began constructing a building for a customer on 7/3/07. The building will be 14 stories tall and is expected to be completed in 2009. Clarence constructs buildings by first putting up the building's frame and then completing each floor. So, it bases its estimates of the extent to which the building is completed on costs incurred to date compared to estimated total costs. It uses the percentage of completion method to account for its projects. It incurred total costs of $2 million by the end of the 2007 fiscal year (12/31/07; at which time it expected to incur an additional $6 million of costs). It incurred an additional $1.8 million of costs during the year ended 12/31/08, and expects to incur another $3.8 million before the project is completed. All costs are paid in cash when incurred. It bills 80% of its actual costs and, as of 12/31/08, it had collected 90% of what was billed. All billings are up to date.
The total contract price is 120% of total expected costs, which means that the contract price changes as total expected costs change.
1: What is profit recognized in fiscal 2007?
2: What is profit recognized in fiscal 2008?
3: An important consideraton for construction companies is whether they have an account called excess of costs over billings or excess of billings over costs.
A.) For this consideration project, as of 12/31/07, (1) which of these two accounts does Clarence have, (2) what is the account balance, and
(3) is it reported as an asset or a liability?
B.) In general, would a financial statements user rather see excess of costs or excess of billings over costs? Why?