How much revenue, expenses and gross profit would recognized » Full Grade
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Question – Trillium Trails Inc. (Trillium)has been asked to resurface trails across the city of Toronto under a fixed price contract to pave 100KMs of bike trails for $25 million at a total estimated cost of $18 million on July 1 2021. Trillium has a June 30 year end date. In the first year 40KM of trail was paved incurring $9 million of costs. In the second year 50KM of trail was completed incurring and additional $8 million of costs. In the last year the remaining 10KM of trail was completed for $1 million. Throughout the contract actual costs were immaterially different from original estimates. Given that Trillium reports under ASPE recommend how revenue should be recognized.
According to ASPE:
P 3400.17, revenue recognized using the percentage of completion method would be determined on a rational and consistent basis such as on the basis of sales value, associated costs, extent of progress or number of acts.
Required –
1) Assume Trillium uses cost as the basis for recognizing the completion of the contract. How much revenue, expenses and gross profit would be recognized in each of the three years.
2) Prepare the journal entries relating to the contract for each of the three years.
3) If management had the objective of income maximization after the first year of the contract, can you recommend an alternative to recognizing revenue and state the impact of your recommendation on the June 30, 2022 balance sheet and income statement.
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