Question

Dobson Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost-to-cost basis. Dobson began work on a lump-sum contract at the beginning of 2019. As bid, the statistics were as follows: Contract price $4,000,000 Estimated costs $3,000,000 At the end of the first year, the following was the status of the contract: Billings to date $2,250,000 Costs incurred to date 1,200,000 Latest forecast total cost 3,000,000 Instructions

(a) Compute the percentage of completion on the contract at the end of 2019.

(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2019.

(c) Make the journal entry to record the income (loss) for 2019 on Dobson's books.

Answer 1

(a)	Computation of the percentage of completion on the contract at the end of 2019:-
	Percentage of completion	=	Cost incurred to date
			Total Estimated Cost
	Percentage of completion	=	$1,200,000
			$3,000,000
		=	40%
(b)	Computation of amount of gross profit that would be reported on this contract at the end of 2019:-
			2019
	Cost incurred during the year		$                    1,200,000
Add:	Cost incurred in earlier years		$ -
	Cost incurred to date		$                    1,200,000
	Total Estimated Cost (A)		$                    3,000,000
	Contract Revenue (B)		$                    4,000,000
	Total Estimated Gross Profit (B-A)		$                    1,000,000
	Percentage of completion		40%
	Revenue to be recognized to date             (% complete * Contact revenue )		$                    1,600,000
Less:	Revenue recognized in earlier years		$ -
	Revenue to be recognized for the year		$                    1,600,000
	Gross Profit to be recognized to date (% complete * Total Estimated Gross Profit )		$                        400,000
Less:	Income recognized in earlier years		$ -
	Gross Profit to be recognized at the end of 2019		$                       400,000

(c)	Journal entry to record the income (loss) for 2019 on Dobson's books:-
Date	Particulars		Debit	Credit
	Construction in progress (gross profit)		$                        400,000
	Cost of Construction (actual costs)		$                    1,200,000
	Revenue from Long term contracts (cost +profit)			$   1,600,000
	(To record gross profit)
	Billings on Construction Contract (account balance)		$                    2,250,000
	Construction in progress (account balance)			$   2,250,000
	(To record amount billed)

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