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Percentage of Completion / Installment Method

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McNeil Construction Company is involved in a long-term construction contract to build an office building. The estimated cost is $30 million and the contract price is $38 million. Other information follows:
Office Building
Cash Collection Actual Costs Incurred

2004 $ 6,000,000 $ 4,500,000
2005 $ 8,000,000 $ 6,000,000
2006 $ 12,500,000 $ 12,000,000
2007 $ 11,500,000 $ 7,500.000

The projected is completed in 2007 and all cash to be received from eh contract has been received.
How would a schedule look if you were determining the gross profit in each year for the long term construction contracting using the percentage of completion method?

2) Westphal Construction sold to Walker Management Company apartments it had constructed. The sales price was $2.5 million. Westphal's cost to construct the apartments was $1.6 million. Westphal appropriately uses the installment method. Additional information:
Cash Collected

2004 $ 800,000
2005 $ 1,200,000
2006 $ 500,000

A) What would the gross profit for each year using the installment method.
B) Assuming the construction costs were $1.75 million what would A) look like.

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1. In the percentage of completion method, we find out the percent completion. This is ...

Solution Summary

The solution explains the calculations using the percentage of completion method and the installment method.

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Dot Point revenue; percentage of completion method; profit on installment sale

1. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as

Service revenue
Deferred Service Revenue
A reduction in installment accounts receivable
A direct addition to retained earnings

2. The percentage-of-completion method must be used when certain conditions exist. Which of the following is NOT one of those necessary conditions?

Estimates of progress toward completion, revenues, and costs are reasonably dependable.
The contractor can be expected to perform the contractual obligation
The buyer can be expected to satisfy some of the obligations under the contract.
The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.

3. During 2008, Steele Corporation sold merchandise costing $1,500,000 on an installment basis for $2,000,000. The cash receipts related to these sales were collected as follows: 2008, $800,000; 2009, $700,000; 2010, $500,000.

What is the rate of gross profit on the installment sales made by Steele Corporation during 2008?

75%
60%
40%
25%

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