Question

In 2018, 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 2020. Information related to the contract is as follows:
2018. 2019 2020

Cost incurred during the year $2,624,000  $3,690,000  $2,074,600

Estimated costs to complete as of year-end 5,576,000   1,886,000 0

Billings during the year 2,200,000   4,114,000   3,686,000

Cash collections during the year 2,000,000   3,800,000   4,200,000

Westgate Construction uses the completed contract method of accounting for long-term construction contracts.

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 2018 (credit "Various accounts" for construction costs incurred).
2-b. In the journal below, complete the necessary journal entries for the year 2019 (credit "Various accounts" for construction costs incurred).
2-c. In the journal below, complete the necessary journal entries for the year 2020 (credit "Various accounts" for construction costs incurred).

Answer 1

. Calculation of Revenue and Gross Profit
Particulars	2018	2019	2020
Cost incurred during the year (A)	$2,624,000	$3690,000	$2,074,600
Estimated costs to complete as of year-end (B)	$5,576,000	$1,886,000	$0
Billings during the year (C)	$2,200,000	$4,114,000	$3,686,000
Cash collections during the year (D)	$2,000,000	$3800,000	$4200,000
Estimated Contract Revenue (E )	$100,00,000	$100,00,000	$100,00,000
Estimated Contract Costs (F) = Cost incurred + Estimated Costs to complete	$82,00,000	$82,00,000	$83,88,600
Estimated Gross Margin (G = E-F)	$18,00,000	$18,00,000	$16,11,400
% of Completion (H) = Cost incurred till date/ Total Estimated cost	32%	77%	100%
Revenue to be recognized = (I = E X H) - revenue recognized till date	$32,00,000	$45,00,000	$23,00,000
Gross Profit = (J = G X H) - gross profit recognized till date	$5,76,000	$8,10,000	$2,25,400

2a. Journal Entries for the year 2018
Date	Journal	Debit	Credit
2018	Construction in Progress	$2,624,000
	Various Accounts		$2,624,000
2018	Accounts Receivable	$2,200,000
	Billing on Construction Contract		$2,200,000
2018	Cash	$2,000,000
	Accounts Receivable		$2,000,000
2018	Construction in Progress	$576,000
	Cost of construction	$2,624,000
	Revenue from Long term Contract		$32,00,000

2b. Journal Entries for the year 2019
Date	Journal	Debit	Credit
2019	Construction in Progress	$3,690,000
	Various Accounts		$3,690,000
2019	Accounts Receivable	$4,114,000
	Billing on Construction Contract		$4,114,000
2019	Cash	$38,00,000
	Accounts Receivable		$38,00,000
2019	Construction in Progress	$8,10,000
	Cost of construction	$3,690,000
	Revenue from Long term Contract		$45,00,000
2c. Journal Entries for the year 2020
Date	Journal	Debit	Credit
2020	Construction in Progress	$2,074,600
	Various Accounts		$2,074,600
2020	Accounts Receivable	$3,686,000
	Billing on Construction Contract		$3686,000
2020	Cash	$4200,000
	Accounts Receivable		$4200,000
2020	Construction in Progress	$2,25,400
	Cost of construction	$2,074,600
	Revenue from Long term Contract		$23,00,000