P5-4. . In 2003, the Westgate Construction Company entered into a contract to co

Question

P5-4. . In 2003, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2005. Information related to the contract is as follows:

2003 2004 2005
Cost incurred during the year $ 2,600,000 $ 3,500,000 $ 2,100,000
Estimated costs to complete as of year-end 5,400,000 1,900,000 -0-
Billings during the year 2,200,000 4,200,000 3,600,000
Cash collections during the year 1,900,000 3,800,000 4,300,000

Westgate uses the percentage-of-completion method of accounting for long-term construction contracts.

Required:
1. Calculate the amount of gross profit to be recognized in each of the three years.
2. Prepare all necessary journal entries for each of the years (credits various accounts for construction costs incurred).
3. Prepare a partial balance sheet for 2003 and 2004 showing any items related to the contract.
4. Calculate the amount of gross profit to be recognized in each of the three years assuming the following costs incurred and costs to complete information:

2003 2004 2005
Cost incurred during the year $ 2,200,000 $ 4,000,000 $ 3,200,000
Estimated costs to complete as of year-end 5,800,000 3,100,000 -0-

Explanation / Answer

1. Calculate the amount of gross profit to be recognized in each of the three years.
                              2003             2004             2005

Contract Price $10,000,000   $10,000,000   $10,000,000
Actual costs
to date              $2,600,000    $6,100,000      $8,200,000

Estimated costs
to complete     $5,400,000     $1,900,000              0

Total estimated                                                           
costs               $8,000,000     $8,000,000      $8,200,000

Gross Profit     $2,000,000     $2,000,000      $1,800,000
                     ====================================

Gross profit recognition
====================
2003   2,600,000 x 2,000,000 / 8,000,000   = $650,000
2004   6,100,000 x 2,000,000 / 8,000,000   
          = $1,525,000 - $650,000                  = $875,000
2005 $1,800,000 - $650,000 - $875,000     = $275,000
________________________________________________
2. Prepare all necessary journal entries for each of the years (credits various accounts for construction costs incurred).
                               2003             2004             2005
Construction In Progress   $2,600,000                $3,500,000               $2,100,000
Various Accounts                           $2,600,000                 $3,500,000              $2,100,000
To record construction costs
________________________________________________________
Accounts Receivables       $2,000,000                 $4,200,000               $3,600,000
Billings on Constuction
Contracts                                    $2,200,000                   $4,200,000                $3,600,000
To record progress billing
______________________________________________________
Cash                              $1,900,000                 $3,800,000                 $4,300,000
Accounts Receivables                    $1,900,000                 $3,800,000                 $4,300,000
To record cash collection
_____________________________________________________
Construction In Progress   $2,600,000                $3,500,000               $2,100,000
Cost of Construction            $650,000                   $875,000                  $275,000
Revenue from Contracts                 $3,250,000                 $4,375,000              $2,375,000
___________________________________________________________________________
3. Prepare a partial balance sheet for 2003 and 2004 showing any items related to the contract.
                                          2003                       2004      
Current Assets
Accounts Receivables                       $2,000,000                     $6,200,000  
Construction In progress $3,250,000                   $7,625,000
Less: Billings                  $2,000,000                   $6,200,000
Cost & Profit in excess
of billings                                        $1,250,000                    $1,425,000

4. Calculate the amount of gross profit to be recognized in each of the three years assuming the following costs incurred and costs to complete information:
                                                 2003            2004            2005    
Cost incurred during the year  $2,200,000 $4,000,000 $3,200,000
Estimated costs to complete
as of year-end                       $5,800,000 $3,100,000          -0-

2003             2004             2005

Contract Price $10,000,000   $10,000,000   $10,000,000
Actual costs
to date              $2,200,000    $6,200,000      $9,400,000

Estimated costs
to complete     $5,800,000     $3,100,000              0

Total estimated                                                           
costs               $8,000,000     $9,300,000      $9,400,000

Gross Profit     $2,000,000        $700,000        $600,000
                     ====================================

Gross profit / (loss) recognition
===========================
2003   2,200,000 x 2,000,000 / 8,000,000   = $550,000
2004   6,200,000 x 700,000 / 9,300,000   
          = $466,667 - $550,000                     = ($83,333)
2005 $600,000 - $550,000 - ($83,333)      = $133,333)




    

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