Question

In 2021, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2023. Information related to the contract is as follows:

	2021				2022				2023
Cost incurred during the year	$	1,584,000			$	3,240,000			$	2,613,600
Estimated costs to complete as of year-end		5,616,000				2,376,000				0
Billings during the year		1,200,000				3,624,000				5,176,000
Cash collections during the year		1,000,000				2,800,000				6,200,000

Assume that Westgate Construction’s contract with Santa Clara County does not qualify for revenue recognition over time.

Required:
1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years.
2-a. In the journal below, complete the necessary journal entries for the year 2021 (credit "Various accounts" for construction costs incurred).
2-b. In the journal below, complete the necessary journal entries for the year 2022 (credit "Various accounts" for construction costs incurred).
2-c. In the journal below, complete the necessary journal entries for the year 2023 (credit "Various accounts" for construction costs incurred).
3. Complete the information required below to prepare a partial balance sheet for 2021 and 2022 showing any items related to the contract.
4. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information.

	2021				2022				2023
Cost incurred during the year	$	2,580,000			$	3,890,000			$	3,280,000
Estimated costs to complete as of year-end		5,780,000				3,280,000				0

5. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information.

	2021				2022				2023
Cost incurred during the year	$	2,580,000			$	3,890,000			$	4,170,000
Estimated costs to complete as of year-end		5,780,000				4,280,000				0

Answer 1

·         Note: Question states that Contract DOES NOT QUALIFY for revenue recognition over time. This means that revenue will be recorded when the contract gets completed.

• Requirements

Requirement 1
	2021	2022	2023
Revenue	$0	$0	$10,000,000
Gross Profits (Loss)	$0	$0	$2,562,400

Requirement 2A
Date	Accounts title	Debit	Credit
2021	Construction in Progress	$1,584,000
	Various accounts		$1,584,000
	(construction cost incurred)
2021	Accounts receivables	$1,200,000
	Billing on Construction contracts		$1,200,000
	(amount billed during the year)
2021	Cash	$1,000,000
	Accounts receivables		$1,000,000
	(cash received)
Requirement 2B
Date	Accounts title	Debit	Credit
2022	Construction in Progress	$3,240,000
	Various accounts		$3,240,000
	(construction cost incurred)
2022	Accounts receivables	$3,624,000
	Billing on Construction contracts		$3,624,000
	(amount billed during the year)
2022	Cash	$2,800,000
	Accounts receivables		$2,800,000
	(cash received)
Requirement 2C
Date	Accounts title	Debit	Credit
2023	Construction in Progress	$2,613,600
	Various accounts		$2,613,600
	(construction cost incurred)
2023	Accounts receivables	$5,176,000
	Billing on Construction contracts		$5,176,000
	(amount billed during the year)
2023	Cash	$6,200,000
	Accounts receivables		$6,200,000
	(cash received)
2023	Construction in Progress	$2,562,400
	Cost of construction	$7,437,600
	Revenue from Long Term contract		$10,000,000
	(revenue recognised)

Requirement 3
Balance Sheet [Partial]	2021		2022
Current Assets:
Accounts receivables		$200,000		$1,024,000
Construction in progress	$1,584,000		$4,824,000
Less: Billings	($1,200,000)		($4,824,000)
Costs and profits in excess of billings		$384,000		$0
Current Liabilities:
Accounts Payable		$0		$0

• [4]

	2021	2022	2023
Revenue	$0	$0	$10,000,000
Gross Profits (Loss)	$0	$0	$250,000

• [5]

	2021	2022	2023
Revenue	$0	$0	$10,000,000
Gross Profits (Loss)	$0	$0	($640,000)