Tullis Construction enters into a long-term fixed price contract to build an office tower for $14,000,000. In the first year of the contract. Tullis incurs $5,000,000 of cost and the engineers determined that the remaining costs to complete are $5,000,000. Tullis billed $7,600,000 in year 1 and collected $5,800,000 by the end of the end of the year. Refer to Tullis Construction. How should Tullis report Construction in Progress and Billings on Construction in Progress at the end of year 1 on the balance sheet assuming the use of the percentage-of-completion method?
A) asset of $0
B) liability of $600,000
C) asset of $5,000,000
D) liability of $5,800,000

Question

Quizplus · Accepted Answer

Under the percentage-of-completion method, Tullis recognizes revenue based on the costs incurred to date relative to total estimated costs. The revenue recognized is $7,000,000 (50% of $14,000,000). Since Tullis billed $7,600,000, the excess billing over revenue recognized is $600,000, which is reported as a liability.

Tullis Construction Enters into a Long-Term Fixed Price Contract to Build