At the end of 2014, there was one building project in process , the $45,000,000
ID: 2456851 • Letter: A
Question
At the end of 2014, there was one building project in process , the $45,000,000 SoFancy University project (SFU), which was started in June 2014. The original estimated costs for the SFU project totaled $41,750,000 but there have been substantial increases in the cost of materials resulting in a current total cost estimate of $45,100,000 for the job. The contract does not allow for renegotiation of the contracted price. threeBrothers has a legally binding enforceable contract with both universities and all parties are expected to be able to perform under the contracts. The general ledger account Construction-in-Progress Inventory shows the following before any 2015 year-end adjusting entries.
Construction-in-Progress Inventory
2014 dr $16,700,000
2014 aje dr 900,000
2015SFU dr 18,000,000
Unadj $35,600,000
Billings-on-Contract
2014 cr $20,000,000
2015SFU cr $15,000,000
Unadj. $35,000,000
I have a general idea how to do this, but having a difficult time getting the correct adjusting entries.
Explanation / Answer
SFU Contract Revenue as per Contract 45,000,000 Current Cost Estimate 45,100,000 Expected Loss in Contract (100,000) Cost Incurred till2015 35,600,000 Billing done Till Date 35,000,000 % Completion = Current cost/Estimated cost= 78.9% % revenue can be recognized 35,521,064 Under billed amount 521,064 Adjusting Journal Entries Account Title Dr $ Cr$ Cost in excess of billing 600,000 Cost of contract (additional loss next year) 21,064 Sales 521,064 Loss on Contract 100,000 As the total loss from contract is known , the total loss of $ 100,000 recognized in 2015 with additional cost recorded as per recommended GAAP. Next year the actual cost will be credited by the same extra cost recoreded this year.
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