Question

Billy's Builders just obtained a contract for $500,000 to build a home for Mr. & Mrs. Mary. Jones estimates his total cost on the job to be $400,000. During the first month of the job, the following transactions occur: • Cash of $10,000 is paid for permits, fees and other startup costs. • An invoice is received from the excavation subcontractor for $10,000. • The first progress billing is prepared for $60,000.

If the above transactions were the only ones Billy's Builders had for the month, what will the revenue, expense, and profit look like under each accounting method

		Accounting Method
	Cash	Accrual	Percentage of Completion	Completed Contract
Revenue
Expense
Profit

Answer 1

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Billy's Builders
Cash Method
Particulars	Amount $	Remarks
Revenue	-	Because only billing is done but payment not received.
Expense
Cash paid for permits	10,000	Only invoice receive from excavation subcontractor but payment not done so it should not be recorded.
Profit	(10,000)	This is revenue less expense.
(This is Revenue less expense)
Accrual Method
Particulars	Amount $	Remarks
Revenue	60,000	The first progress billing.
Expense
Cash paid for permits	10,000
Invoice from the excavation subcontractor	10,000
Expense	20,000
Profit	40,000	This is revenue less expense.
Percentage of Completion	Amount $	Remarks
Contract Price	500,000
Cost Incurred during the year	20,000	This is total expense under accrual method.
Estimated cost to complete	380,000	This is total cost $ 400,000 less expense incurred $ 20,000.
Estimated total cost	400,000
Percentage complete	5.00%	This is Cost Incurred during the year/ total cost.
Revenue to be recognized	25,000	This is Percentage complete* Contract Price
Expense	20,000
Profit	5,000	This is revenue to be recognized less expense.
Completed Contract	Amount $	Remarks
Revenue	-	Revenue will be recognized when the job is finished.
Expense
Cash paid for permits	10,000
Invoice from the excavation subcontractor	10,000
Expense	20,000
Profit	-	Profit or loss will be recognized when the job is finished.