Reference no: EM132736117

Star Construction Corporation has a contract to construct a building for $10,950,000. The building is controlled by the customer throughout the term of the contract. Total costs to complete the building were originally estimated at $8,850,000. Construction commenced on 4 February 20×5. Actual costs were in line with estimated costs for 20×5 and 20×6. In 20×7, actual costs exceeded estimated costs by $150,000.

Total construction costs incurred in each year were as follows:

20X5: $2,700,000
20X6: $4,500,000
20X7: $1,800,000

Progress billings based on the amount of work completed were collected each year. Star Construction uses the percentage-of-completion method. The is based on costs incurred compared with estimated total costs of the project.

Company also billed the client and collected the following payments

Year      Billings            Payments Received

20X5:   2,300,000        $2,100,000
20X6:   $4,900,000      $4,700,000
20X7:   $3,750,000        $4,150,000

Problem 1: Calculate Net income for the construction project for each of the three years:

a) Completed contract method?

b) Percentage-of-completion method? (basis: estimated costs to complete)