In 2013, the company entered into a contract to construct a road for a customer
ID: 2504676 • Letter: I
Question
In 2013, the company entered into a contract to construct a road for a customer for $10,000,000. The road was completed in 2015. Information related to the contract is as follows:
2013 2014 2015
Billings during year $ 2,000,000 $4,000,000 $4,000,000
Cash collections during year $ 1,800,000 $3,600,000 $4,600,000
Contract price $ 10,000,000 $ 10,000,000 $ 10,000,000
Cost incurred $ 2,400,000 $ 3,600,000 $2,200,000
Estimated cost to complete $ 5,600,000 $ 2,000,000 --
The company uses the percentage-of-completion method of accounting for long-term construction contracts.
Calculate the amount of gross profit to be recognized in each of the three years.
Prepare a partial balance sheet for each year showing the items related to the contract.
2013 2014 2015
Billings during year $ 2,000,000 $4,000,000 $4,000,000
Cash collections during year $ 1,800,000 $3,600,000 $4,600,000
Contract price $ 10,000,000 $ 10,000,000 $ 10,000,000
Cost incurred $ 2,400,000 $ 3,600,000 $2,200,000
Estimated cost to complete $ 5,600,000 $ 2,000,000 --
Explanation / Answer
Calculation of the amount of gross profit (loss) to be recognized in each of the three years
A. For the year 2013
Estimated total costs = Cost incurred to date + Estimated costs to complete as of year-end
= 2,400,000 + 5,600,000
= $ 8,000,000
% of completion = (2400000/8000000) x 100 = 30 %
Revenue to be recognised = 30 % of 10,000,000 = 3,000,000
Gross profit = Revenue to be recognised - Cost incurred
Gross profit = 30 % of 10,000,000 - 2,400,000
Gross profit = 3,000,000 - 2,400,000 = $ 600,000
B. For the year 2014
Estimated total costs = Cost incurred to date + Estimated costs to complete as of year-end
= (2,400,00+3,600,000) + 2,000,000 = 6,000,000 + 2,000,000
= $ 8,000,000
% of completion = (6000,000/8,000,000) x 100 = 75 %
Revenue to be recognised = 75 % of 10,000,000 = $7,500,000 but it is already recognised $3,000,000 in 2013.
Revenue to be recognised in 2014 =7,500,000 - $3,000,000 = $4,500,000
Gross profit = Revenue to be recognised - Cost incurred in 2014
Gross profit = 4,500,000 - 3,600,000 = $900,000
C. For the year 2015
Estimated total costs = Cost incurred to date + Estimated costs to complete as of year-end
= (2,400,00+3,600,000)+2,200,000
= $ 8,200,000
% of completion = (8,200,000/8,200,000) x 100 = 100 %
Revenue to be recognised = 100 % of 10,000,000 = $10,000,000
but it is already recognised $3,000,000 in 2013 & $4,500,000 in 2014.
.
Revenue to be recognised in 2015 =10,000,000 -(3,000,000+4,500,000) = $2,500,000
Gross profit = Revenue to be recognised - Cost incurred in 2015
Gross profit = 2,500,000 - 2,200,000 = $300,000
2) partial balance sheet for each year showing the items related to the contract
(i)necessary journal entries for the year 2013
Record construction costs.
Dr Work in Progress $ 2,400,000
Cr Cash/Accounts payable $ $ 2,400,000
Record progress billings.
Dr Accounts receivable $ 2,000,000
Cr Progress billings $ 2,000,000
Record cash collections.
Dr Cash $ 1,800,000
Cr AR $ 1,800,000
Record gross profit.
Dr Progress billings $3,000,000
Cr Revenue $3,000,000
Dr Cost of services $ 2,400,000
Cr Work in Progress $ 2,400,000
(ii)necessary journal entries for the year 2014
Record construction costs.
Dr Work in Progress $ 3,600,000
Cr Cash/Accounts payable $ 3,600,000
Record progress billings.
Dr Accounts receivable $ 4,000,000
Cr Progress billings $ 4,000,000
Record cash collections.
Dr Cash $ 3,600,000
Cr AR $ 3,600,000
Record gross profit.
Dr Progress billings $4,500,000
Cr Revenue $4,500,000
Dr Cost of services $ 3,600,000
Cr Work in Progress $ 3,600,000
(iiI)necessary journal entries for the year 2015
Record construction costs.
Dr Work in Progress $ 2,200,000
Cr Cash/Accounts payable $ 2,200,000
Record progress billings.
Dr Accounts receivable $ 4,000,000
Cr Progress billings $ 4,000,000
Record cash collections.
Dr Cash $ 4,600,000
Cr AR $ 4,600,000
Record gross profit.
Dr Progress billings $2,500,000
Cr Revenue $2,500,000
Dr Cost of services $ 2,200,000
Cr Work in Progress $ 2,200,000
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