18-29 (Recognition of Revenue on Long-Term Contract and Entries) Hamilton Constr

Question

18-29 (Recognition of Revenue on Long-Term Contract and Entries) Hamilton Construction EJLF Company uses the percentage-of-completion method of accounting. In 2014, Hamilton began work under contract #E2-D2, which provided for a contract price of $2,200,000. Other details follow: 2014 2015 Costs incurred during the year $640,000 $1,425,000 Estimated costs to complete, as of December 31 960.000 -0- Billings during the year 420.000 1.680.000 Collections during the year 350.000 1.500.000 Instructions What portion of the total contract price would be recognized as revenue in 2014? In 2015? Assuming the same facts as those above except that Hamilton uses the completed-contract method of accounting, what portion of the total contract price would be recognized as revenue in 2015? Prepare a complete set of journal entries for 2014 (using the percentage-of-completion method).

Explanation / Answer

(a) Stage of completion as per percentage of completion method = (Cost incurred/total estimated cost)*100

Statement showing Revenue to be recognised

(b) Under completed contract method of accounting all the revenue and profit is recognised only when contract is completed. Accordingly, in the present case revenue to be recognised under completed contract method of accounting in 2015 will be $2200,000.

(c) Jornal entries

Particulars 2014 2015 Cost incurred (a) $640000 $1425000 Total Estimated cost (b) $1600000 $1425000 Percentage completion (a/b)*100 40% 100% Revenue to be recognised (Total contract revenue*percentage completion) $880000 $2200000 less: revenue already recognised nil $880000 Revenue to be recognised during the year $880000 $1320000

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