Reynolds Custom Builders (RCB) was established in 1987 by Avery Conway
P18-5 Reynolds Custom Builders (RCB) was established in 1987 by Avery
Conway and initially built high-quality customized homes under contract with
specific buyers. In 2002, Conway’s two sons joined the company and expanded
RCB’s activities into the high-rise apartment and industrial plant markets.
Upon the retirement of RCB’s long-time financial manager, Conway’s sons
recently hired Ed Borke as controller for RCB. Borke, a former college friend
of Conway’s sons, has been associated with a public accounting firm for the
last 6 years.
Upon reviewing RCB’s accounting practices, Borke observed that RCB
followed the completed-contract method of revenue recognition, a carryover from
the years when individual home building was the majority of RCB’s operations.
Several years ago, the predominant portion of RCB’s activities shifted to the
high-rise and industrial building areas. From land acquisition to the
completion of construction, most building contracts cover several years. Under
the circumstances, Borke believes that RCB should follow the
percentage-of-completion method of accounting. From a typical building
contract, Borke developed the following data.
BLUESTEM TRACTOR PLANT
Contract price
$8,000,000
2014 2015
2016
Estimated costs $1,600,000 $2,880,000 $1,920,000
Progress billings 1,000,000 2,500,000 4,500,000
Cash collections 800,000 2,300,000 4,900,000
Instructions
(a) Explain the difference between completed-contract revenue
recognition and percentage- of-completion revenue recognition.
(b) Using the data provided for the Bluestem Tractor Plant and
assuming the percentage-of-completion method of revenue recognition is used,
calculate RCB’s revenue and gross profit for 2014, 2015, and 2016, under each
of the following circumstances.
(1) Assume that all costs are incurred, all billings to customers
are made, and all collections from customers are received within 30 days of
billing, the RCB’s revenue, cost of sales, and gross profit for 2014, 2015, and
2016, are calculated as follows:
(2) Further assume that, as a result of unforeseen local ordinances
and the fact that the building site was in a wetlands area, RCB experienced
cost overruns of $800,000 in 2014 to bring the site into compliance with the
ordinances and to overcome wetlands barriers to construction
(3) Further assume that, in addition to the cost overruns of
$800,000 for this contract incurred under part (b)2, inflationary factors over
and above those anticipated in the development of the original contract cost
have caused an additional cost overrun of $850,000 in 2015. It is not
anticipated that any cost overruns will occur in 2016
SOLUTION PREVIEW
(2) Further assume that, as a result of unforeseen local ordinances
and the fact that the building site was in a wetlands area, RCB experienced
cost overruns of $800,000 in 2014 to bring the site into compliance with the
ordinances and to overcome wetlands barriers to construction
Percentage-of-Completion (Cost-to-Cost Basis)
($000
omitted)
|
Year
|
Contract
Price |
Costs
to Date |
Estimated
Total Costs |
Estimated
Gross
Profit |
Percent
Complete |
|
2014
|
$8,000
|
$2,400
|
$7,200
|
$800
|
33.33%
|
|
2015
|
8,000
|
5,280
|
7,200
|
800
|
73.33%
|
File name: P18-5 Reynolds Custom.xls File
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