Question
In: Accounting
At the beginning of 2021 Carefree Contracting Corporation (CCC) enters into a contract to build a...
At the beginning of 2021 Carefree Contracting Corporation (CCC) enters into a contract to build a home for a customer that is expected to take three years to complete. The contract price is $4,000,000. Completion is scheduled for the end of 2023. CCC's year end is December 31.
|
2021 |
2022 |
2023 |
|
|
Actual costs incurred current year |
$750,000 |
$2,250,000 |
$775,000 |
|
actual costs incurred prior years |
-0- |
750,000 |
3,000,000 |
|
Cumulative actual costs incurred to date |
750,000 |
3,000,000 |
3,775,000 |
|
Estimated costs to complete end of year |
2,250,000 |
750,000 |
-0- |
|
Total Costs |
$3,000,000 |
$3,750,000 |
$3,775,000 |
|
Billings |
$700,000 |
$2,600,000 |
$700,000 |
|
Cash Collections |
500,000 |
2,000,000 |
1,500,000 |
a. Compute the gross profit for 2021, 2022 and 2023 using the percentage-of-completion method.
b. Compute the gross profit for 2021, 2022 and 2023 using the zero gross profit method.
c. Prepare all necessary entries for 2021 assuming the use of the percentage-of-completion method.
d. Determine the net asset or net liability position for CCC at the end of 2021 and 2022 assuming that the percentage of completion method is used. e. Prepare the closing entry in 2023 under the percentage of completion method. f. Prepare the closing entries in 2023 under the zero gross profit method is used.
Solutions
Expert Solution
a. gross profit using the percentage-of-completion method.
| Year | Cost | Cumulative Cost Incurred | Cumulative % of completion | Year on Year % | Cumulative revenue to be recognized | Year on Year revenue | Gross profit |
| 2021 | $ 750,000.00 | 750000 | 20% | 20% | $ 794,702 | $ 794,702 | $ 44,702 |
| 2022 | $ 2,250,000.00 | 3000000 | 79% | 60% | $ 3,178,808 | $ 2,384,106 | $ 134,106 |
| 2023 | $ 775,000.00 | 3775000 | 100% | 21% | $ 4,000,000 | $ 821,192 | $ 46,192 |
| $ 225,000 |
b. gross profit using the zero gross profit method.
| Year | Cost | Year on Year revenue | Gross profit |
| 2021 | $ 750,000.00 | $ 700,000 | $ (50,000) |
| 2022 | $ 2,250,000.00 | $ 2,600,000 | $ 350,000 |
| 2023 | $ 775,000.00 | $ 700,000 | $ (75,000) |
c.Journal entries using the percentage-of-completion method.
| Year | Particular | Debit amount | Credit amount |
| 2021 | CIP | $ 750,000.00 | |
| Cash | $ 750,000.00 | ||
| Account Receivable | $ 700,000.00 | ||
| Billings | $ 700,000.00 | ||
| Cash | $ 500,000.00 | ||
| Account Receivable | $ 500,000.00 | ||
| Construction Expenses | $ 750,000.00 | ||
| Construction In Progress | $ 44,702.00 | ||
| Revenue | $ 794,702.00 |
| Year | Particular | Debit amount | Credit amount |
| 2022 | CIP | $ 2,250,000.00 | |
| Cash | $ 2,250,000.00 | ||
| Account Receivable | $ 2,600,000.00 | ||
| Billings | $ 2,600,000.00 | ||
| Cash | $ 2,000,000.00 | ||
| Account Receivable | $ 2,000,000.00 | ||
| Construction Expenses | $ 2,250,000.00 | ||
| Construction In Progress | $ 134,106.00 | ||
| Revenue | $ 2,384,106.00 | ||
| Year | Particular | Debit amount | Credit amount |
| 2023 | CIP | $ 775,000.00 | |
| Cash | $ 775,000.00 | ||
| Account Receivable | $ 700,000.00 | ||
| Billings | $ 700,000.00 | ||
| Cash | $ 1,500,000.00 | ||
| Account Receivable | $ 1,500,000.00 | ||
| Construction Expenses | $ 775,000.00 | ||
| Construction In Progress | $ 46,192.00 | ||
| Revenue | $ 821,192.00 |
e.closing entry
| Billings | $ 40,000.00 | |
| CIP | $ 40,000.00 |
d.
| Particular | 2021 | 2022 |
| Cash | -250000 | -500000 |
| Account Receivable | 200000 | 800000 |
| Unbilled Revenue | 44102 | -171792 |
| Net Assets | -5898 | 128208 |
| Retained Earnings | 44102 | 134106 |
| Net Liability | 44102 | 134106 |
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