Exercise 18-36 2017 2018 LINK TO TEXT LINK TO TEXT Account Titles and Explanatio

Question

Exercise 18-36

2017

2018

LINK TO TEXT

LINK TO TEXT

Account Titles and Explanation

Debit

Credit

(To record cost of of construction.)

(To record progress billings.)

(To record collections.)

(To recognize revenue.)

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Exercise 18-36

Oriole Construction Company uses the percentage-of-completion method of accounting. In 2017, Oriole began work under contract #E2-D2, which provided for a contract price of $2,156,000. Other details follow:

2017

2018

Costs incurred during the year $598,290 $1,421,000 Estimated costs to complete, as of December 31 1,018,710 –0– Billings to date 425,000 2,156,000 Collections during the year 357,000 1,497,000

Explanation / Answer

Percentage of completion method, a method used to recognize the revenue in the books in case of long term contracts. It clearly says that the revenue is recognised on the basis of % of work completion.

revenue recognized = Percentage of work completed in the period/Total contract value

% of work completed = Tota cost incurred till date/Total cost of the project

IN 2017, the cost incurred till the end of the year is 598,290 and on that date the estimted cost to complete the project is another 1,018,710. Thus the total cost to complete the whole project will be 598,290+1,018,710 = 1,617,000.

using above formulas, % of work completion till year end 2017 is -

598,290/(298,290+1,018,710) = 37%

Revenue to be recognised - 37% of total contract value = 37/100x2,156,000 = 797,720

b) in 2018, the contract has been 100% completed therefore the remaining whole revenue will be recognized in that year. which will be = 2,156,000-797,720 = $1,358,280

2. Completed contract method, as the name suggests, the revenue is recognized as and when the contract is fully completed. Therefore in 2017, there will not be any contract revenue recognized. In 2018, the whole amount will be reconized as contract revenue. which will be - $2,156,000

3. Journal entries:

a) To record construction costs incurred - The cost has already been incurred thus constrution in progess will be debited and accounts payable will be credite

Construction in progess A/c Dr.598 290

            To Accounts payble A/c   598,290

b) To record progess billings : Accounts receivale account will be debited as to make it due from receivable and progress billing account will be credit :

Accounts Receivable A/c   DR. 425,000

                   To progess billings        425,000

C)TO receive from AR - Cash will be debited as it is coming in and accounts receivables wll be credited

Cash A/c Dr.357,000

      To AR          357,000

d) To recognize revenue -

Construction in progess a/c Dr. 797,720

             To construction revenue a/c 797,720

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