Question

Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,900,000. The project was begun in 2020 and completed in 2021. Cost and other data are presented below:

	2020			2021
Costs incurred during the year	$	420,000		$	1,200,000
Estimated costs to complete		980,000			0
Billings during the year		450,000			1,450,000
Cash collections during the year		350,000			1,550,000

Assume that Beavis recognizes revenue on this contract over time according to percentage of completion.

Required:
Prepare all journal entries to record costs, billings, collections, and profit recognition. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

The percentage of completion method of revenue recognition is a concept in accounting that refers to a method by which a business recognizes revenue on an ongoing basis depending on the stages of a project’s completion. In other words, the percentage of completion method is used for longer-term projects and recognizes revenue and expenses as a percentage of the project’s completion during the period.

First of all we need to compute the revenues and expenses to be recorded, which is as follows:

			Amount in $
Particulars		2020	2021
Cost incurred during the year	A	420,000	1,200,000
Cost incurred during previous year/years	B	-	420,000
Estimated cost still to be incurred	C	980,000	-
Total Cost	D=A+B+C	1,400,000	1,620,000
Percentage Completion till date	E=(A+B)/D	30.00%	100.00%
Percentage work already completed till last year	F	0	30.00%
Percentage revenue to be considered this year	G=E-F	30.00%	70.00%
Revenue	$	570,000	1,330,000
	H=1900000*G	(1,900,000*30%)	(1,900,000*70%)
Expenses	$	420,000	1,200,000
Gross Profit		150,000	130,000

Journal Entries for the year 2020:

Account Titles and Explanations	Debit	Credit
Construction in progress (CIP)	$420,000
Cash		$420,000
(Being entry made for recording cost incurred)
Accounts Receivable	$450,000
Billing on CIP		$450,000
(Being entry made for recording billings)
Cash	$350,000
Accounts Receivable		$350,000
(Being entry made for recording billings)
Construction Expense	$420,000
Construction in progress (CIP)	$150,000
Construction Revenue		$570,000
(Being entry made for recording revenue)

Journal Entries for the year 2021:

Account Titles and Explanations	Debit	Credit
Construction in progress (CIP)	$1,200,000
Cash		$1,200,000
(Being entry made for recording cost incurred)
Accounts Receivable	$1,450,000
Billing on CIP		$1,450,000
(Being entry made for recording billings)
Cash	$1,550,000
Accounts Receivable		$1,550,000
(Being entry made for recording billings)
Construction Expense	$1,200,000
Construction in progress (CIP)	$130,000
Construction Revenue		$1,330,000
(Being entry made for recording revenue)
Billings on CIP	$1,900,000
Construction in Progress		$1,900,000
(Being entry made for finalisation and completion of project)