Case Scenario:
Recognition of Profit for Long-Term Contracts
Andre Agassi Construction Co began operations January 1, 2008. During the year, Agassi entered into a contract with Lindsey Davenport Corp. to construct a manufacturing facility. At the time, Agassi estimated that it would take 5 years to complete the facility at a total cost of $4,500,000. The total contract price for construction of the facility is $6,300,000. During the year, Agassi incurred $1,185,800 in construction costs related to the construction project. The estimated cost to complete the contract is $6,204,200. Lindsey Davenport Corp. was billed and paid 30% of the contract price.
Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31, 2008, under each of the following methods.
(a) Completed-contract method
(b) Percentage-of-completion method