Question

the construction activity for the year-end 31 December 2020, are as follows:

project	contract price	costs incurred to 31/12/2020	estimated costs to complete	billing to 31/12/2020	cash collections to 31/12/2020
AB	$2,000,000	$600,000	$1,400,000	$450,000	$410,000

Required:

1) Prepare a schedule by project, showing clearly the amount of gross profit (loss) of the project before deducting selling, general, and administrative expenses for the year ended 31 December 2020 using the percentage-of-completion method. (based on estimated costs.)

2)Based on the schedule, show the amount of gross profit ( or loss) before selling, general, and administrative expenses for the year ended 31 December 2020, which would be reported if the following method are used:

(I) the cost-recovery method.

(II) The percentage-of-completion method ( based on estimated costs)

3) Prepare all the necessary general journal entries for the project AB for the financial year 2020, using the percentage-of-completion method.

Answer 1

				Cost Recovery Method
				Gross Profit will account only when total cost related to respective sales
				have been received fully by the company from customer and after
				whole cost amount has been received
	Percentage of Completion Method
		$'000			$'000
		2020			2020
	Contract Value	2,000		Contract Value	2,000
	Costs to date	600		Costs to date	600
	Estimated Costs to complete	1,400		Estimated Costs to complete	1,400
	Progress Billings during the year	450		Progress Billings during the year	450
	Cash Collected During the year	410		Cash Collected During the year	410
	Contract Price	2,000		Contract Price	2,000
	Cost to date	600		Cost to date	600
	Estimated Costs to complete	1,400		Estimated Costs to complete	1,400
	Total Estimated Cost	2,000		Total Estimated Cost	2,000
	% of Completion(600/2000)	30%		% of Completion(600/2000)	30%
	Revenue to date(2000*30%)	600		Revenue to date(2000*30%)	600
	Gross Profit to date(600-600)	-		Gross Profit to date	-
	Journal Entry
	Construction in Progress(Asset)	600	Dr
	Accounts Payable	600	Cr
	Accounts Receivable	450	Dr
	Billings on Construction in Progress	450	Cr
	(Being Billing made)
	Cash	410	Dr
	Accounts Receivable	410	Cr
	(Being Cash Colected)
	Construction Expenses	600	Dr
	Construction in Progress(Asset)	-
	Revenue on Long Term Contract	600	Cr