During 2017, Martinez Corporation started a construction job with a contract pri
ID: 2520603 • Letter: D
Question
During 2017, Martinez Corporation started a construction job with a contract price of $4.06 million. Martinez ran into severe technical difficulties during construction but managed to complete the job in 2019. The contract is non-cancellable. Under the terms of the contract, Martinez sends billings as revenues are earned. Billings are nonrefundable. The following information is available:2017 2018 2019 Costs incurred to date $ 580,000 $2,030,000 $3,960,000 Estimated costs to complete 3,045,000 2,030,000 -0-
Explanation / Answer
a) Gross profit for each year under the percentage-of-completion method:
2017:
% Complete = Costs to date / total estimated costs
= (580,000 / 3,045,000) * 100 = 19.04%
Gross Profit = Contract amount * % complete
= 4,060,000 * 19.04% = $773,024 Ans.
2018:
% Complete = Costs to date / total estimated costs
= (2,030,000 / 2,030,000) * 100 = 100%
Gross Profit = Contract amount * % complete
= 4,060,000 * 100% = $4,060,000 Ans.
2019:
% Complete = Costs to date / total estimated costs
= (3,960,000 / 0) * 100 = Nil
Gross Profit = Contract amount * % complete
= 4,060,000 * Nil = Nil Ans.
b) Journal entry for 2018 to recognize the revenue from the contract, assuming the percentage-of-completion method:
Sales A/c Dr. 4,060,000
Billing in excess of cost A/c 4,060,000
c) Gross profit or loss that should be recognized each year under the completed-contract method:
2017:
Gross Profit = Contract price - Cost incurred in completing the contract
= 4,060,000 - 580,000 = $3,480,000 Ans.
2018:
Gross Profit = Contract price - Cost incurred in completing the contract
= 4,060,000 - 2,030,000= $2,030,000 Ans.
2019:
Gross Profit = Contract price - Cost incurred in completing the contract
= 4,060,000 - 3,960,000= $100,000 Ans.
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