Long-Term Construction Contract
Response to the following problem:
The Osborn Construction Company began operations January 2, 2010. During the year, Osborn entered into a contract with Redbeard Razor Corporation to construct a manufacturing facility. At that time, Osborn estimated that it would take five years to complete the facility at a total cost of $4,800,000. The total contract price for construction of the facility is $6,000,000. During the year, Osborn incurred $1,250,000 in construction costs related to the construction project. The estimated cost to complete the contract is $3,750,000. Redbeard was billed and paid 30% of the contract price.
Required
Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31, 2010 and the amount to be shown as "cost of uncompleted contract in excess of related billings" or "billings on uncompleted contract in excess of related costs" on December 31, 2010, under each of the following methods:
1. Completed-contract method
2. Percentage-of-completion method
Show supporting computations in good form.