Question 5.5 (Total: 34 marks)
The board of directors for Apache Construction Corp. is
meeting to choose between the completed-contract method and the
percentage-of-completion method of accounting for long-term
contracts in the company's financial statements. You have been
engaged to assist Apache’s controller in the preparation of a
presentation to be given at the board meeting. The controller
provides you with the following information:
· Apache commenced doing business on January 1, 2020.
· Construction activities for the year ended December 31,
2020, were as follows:
Project
Total contract
Price
Billings through
12/31/20
Cash collections through
12/31/20
A
$ 615,000
$ 340,000
$ 310,000
B
450,000
135,000
135,000
C
475,000
475,000
390,000
D
600,000
240,000
160,000
E
480,000
400,000
400,000
$ 2,620,000
$ 1,590,000
$ 1,395,000
Project
Contract costs incurred through 12/31/20
Estimated additional costs to complete contracts
A
$ 510,000
$ 120,000
B
130,000
260,000
C
350,000
-0-
D
370,000
290,000
E
320,000
80,000
$ 1,680,000
$ 750,000
· Each contract is with a different customer.
· Any work remaining to be done on the contracts is expected
to be completed in 2021.
Required
1. Prepare a schedule by project, calculating the amount of
gross profit (or loss) for the 2020 calendar year, which would be
reported under:
a. The completed-contract method.
b. The percentage-of-completion method (based on estimated
costs).
2. Prepare the general journal entry to record revenue and
gross profit on project B for 2020, assuming that the
percentage-of-completion method is used.
3. Indicate the balances that would appear in the statement of
financial position at December 31, 2020 for the following accounts
for Project D, assuming that the percentage-of-completion method is
used.
a. Accounts Receivable
b. Billings on Construction in Process
c. Construction in Process
How would the balances in the accounts discussed in part 3
above change (if at all) for Project D, if the completed-contract
method is used?