Otis Construction Company (OCC) has entered into a contract with total expected

Question

Otis Construction Company (OCC) has entered into a contract with total expected revenue of $10 million. OCC expects that total costs will be $8,750,000. Below are the costs, billings and cash collections for the three years of the contract.

Based on surveys of the stage of completion, it was determined the contract was 10% complete in year 1, 85% complete in year 2 and was 100% complete in year 3. Prepare all necessary journal entries for the three years under the following four scenarios. Use construction in progress (CIP) as a clearing account for your journal entries. Also provide the balances of the various accounts that will be reported on the financial statements each year.

1. The company reports using IFRS and meets the criteria necessary to use the percentage-ofcompletion method.

2. The company reports using US GAAP and meets the criteria necessary to use the percentage-ofcompletion method. OCC uses the gross-profit approach.

3. The company reports using US GAAP and does not meet the criteria to use the percentage-ofcompletion method.

4. The company reports using IFRS and does not meet the criteria to use the percentage-ofcompletion method. It is not able to reliably estimate its revenue until the final year of the contract.

Year 1 Year 2 Year 3 cost this year 1,500,000 6,000,000 1,250,000 billing this year 1,200,000 5,800,000 3,000,000 cash collected this year 1,000,000 4,500,000 4,000,000

Explanation / Answer

2. The company reports using US GAAP and meets the criteria necessary to use the percentage-ofcompletion method. OCC uses the gross-profit approach.

1 Particulars Year1 Year2 Year3 Total Revenue to date 1000000 8500000 500000 10000000 Costs to date 875000 7437500 437,500 8,750,000 Gross profit to date 125000 1062500 62500 1250000 10% 85% 100% Particulars Year1 Year2 Year3 Dr CIP 1,500,000 6,000,000 1,250,000 Cr Cash 1,500,000 6,000,000 1,250,000 Dr Account receivable 1,200,000 5,800,000 3,000,000 Cr Billings on CP 1,200,000 5,800,000 3,000,000 Dr Cash 1,000,000 4,500,000 4,000,000 Cr Account Receivable 1,000,000 4,500,000 4,000,000 Dr CIP 125000 1062500 62500 Dr Construction expense 875000 7437500 437500 Cr Construction revenue 1000000 8500000 500000 Dr Billings on CIP 10000000 Cr CIP 10000000

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