a. Compute net income under the percentage- of- completion and completed- contract methods for each year. (Ignore income taxes.)
Accounting & FinanceGeneralWorked Solution
Use the information related to Bigelow Contractors from P8- 6 and P8- 7 to answer the following questions. Assume that Bigelow’s total assets were $ 5,000,000 and its liabilities were $ 2,000,000 at the beginning of the year.
a. Compute net income under the percentage- of- completion and completed- contract methods for each year. (Ignore income taxes.)
b. Compute the total assets, liabilities, and equity under the percentage- of- completion and completed-contract methods at the end of each year.
c. Compute the profit margins under the percentage- of- completion and completed- contract methods each year. Comment on the differences.
d. Compute the debt- to- equity ratios under the percentage- of- completion and completed- contract methods each year. Comment on the differences.
SOLUTION
a.From the solutions to P8-6, parts b and c, and P8-7, part c.
P8-6: Percentage-of-completion
2015
2016
2017
Current Year Revenue
$1,200,000
$300,000
$500,000
Current Year Cost
900,000
300,000
600,000
Current Year Gross Profit Recognition
$300,000
$0
$(100,000)
Current Year Net Income(Loss)
$300,000
$0
$(100,000)
🔒
Unlock the complete assignment
You are viewing the free preview. Purchase this assignment once to reveal the complete resource.
$9.99 USD
Secure checkout is completed by Stripe.
P8-7: Completed Contract
2015
2016
2017
Current Year Revenue
$900,000
$300,000
$800,000
Current Year Cost
900,000
300,000
600,000
Current Year Gross Profit Recognition
$0
$0
$200,000
Current Year Net Income
$0
$0
$200,000
b.
P8-6: Percentage-of-completion
2015
2016
2017
Total Assets
$5,300,000
$5,300,000
$5,200,000
Liabilities:
Liabilities, January 1, 2015
$2,000,000
$2,000,000
$2,000,000
Construction Related Liabilities
Billings in Excess of Costs and Recognized Profits
0
0
0
Total Liabilities
$2,000,000
$2,000,000
$2,000,000
Total Equity
$3,300,000
$3,300,000
$3,200,000
P8-7: Completed Contract
2015
2016
2017
Total Assets
$5,000,000
$5,200,000
$5,200,000
Liabilities:
Liabilities, January 1, 2015
$2,000,000
$2,000,000
$2,000,000
Construction Related Liabilities
Billings in Excess of Costs
0
200,000
0
Total Liabilities
$2,000,000
$2,200,000
$2,000,000
Total Equity
$3,000,000
$3,000,000
$3,200,000
c.
and d. The profit margins under the percentage-of-completion and completed-contract methods each year are computed below.
2015
2016
2017
Percentage-of-Completion Method
Completed-Contract Method
The profit margin under the completed-contract method is 0% in 2015 and 2016 as expected. Under the percentage-of-completion method, profit margin varies with estimated revenues and gross profit. Note also, under both methods, the profit margin on the contract overall is 10% (total net income of $200,000 divided by total revenues of $2,000,000).
d. The debt-to-equity ratios under the completed-contract and percentage-of-completion methods each year are computed below.
2015
2016
2017
Percentage-of-Completion Method
Completed-Contract Method
The debt-to-equity ratio is lower in 2015 and 2016 under the percentage-of-completion method than the completed-contract method, as expected. In the last year of the contract, the debt-to-equity ratio is the same, as the same amounts of net income are earned over the life of the contract.