Question

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In 2021, 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 2023. Information related to the contract is as follows:

	2021			2022			2023
Cost incurred during the year	$	2,542,000		$	3,772,000		$	2,074,600
Estimated costs to complete as of year-end		5,658,000			1,886,000			0
Billings during the year		2,020,000			4,294,000			3,686,000
Cash collections during the year		1,810,000			3,800,000			4,390,000

Westgate recognizes revenue over time according to percentage of completion.

2-a. In the journal below, complete the necessary journal entries for the year 2021 (credit "Various accounts" for construction costs incurred).
2-b. In the journal below, complete the necessary journal entries for the year 2022 (credit "Various accounts" for construction costs incurred).
2-c. In the journal below, complete the necessary journal entries for the year 2023 (credit "Various accounts" for construction costs incurred).

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.

Computation of Revenues and Cost recognized Year Wise:

				Amount in $
Particulars		2021	2022	2023
Cost incurred during the year	A	2,542,000	3,772,000	2,074,600
Cost incurred during previous year/years	B	-	2,542,000	6,314,000
Estimated cost still to be incurred	C	5,658,000	1,886,000	-
Total Cost	D=A+B+C	8,200,000	8,200,000	8,388,600
Percentage Completion till date	E=(A+B)/D	31.00%	77.00%	100.00%
Percentage work already completed till last year	F	0	31.00%	77.00%
Percentage revenue to be considered this year	G=E-F	31.00%	46.00%	23.00%
Revenue	$	3,100,000	4,600,000	2,300,000
	H=10000000*G	(10,000,000*37.5%)	(10,000,000*46%)	(10,000,000*23%)
Expenses	$	2,542,000	3,772,000	2,074,600
Gross Profit		558,000	828,000	225,400

a. Journal entries for the year 2021:

Account Titles and Explanations	Debit	Credit
Construction in progress (CIP)	$2,542,000
Various Accounts		$2,542,000
(Being entry made for recording cost incurred)
Accounts Receivable	$2,020,000
Billing on CIP		$2,020,000
(Being entry made for recording billings)
Cash	$1,810,000
Accounts Receivable		$1,810,000
(Being entry made for recording billings)
Construction Expense	$2,542,000
Construction in progress (CIP)	$558,000
Construction Revenue		$3,100,000
(Being entry made for recording revenue)

b. Journal entries for the year 2022:

Account Titles and Explanations	Debit	Credit
Construction in progress (CIP)	$3,772,000
Various Accounts		$3,772,000
(Being entry made for recording cost incurred)
Accounts Receivable	$4,294,000
Billing on CIP		$4,294,000
(Being entry made for recording billings)
Cash	$3,800,000
Accounts Receivable		$3,800,000
(Being entry made for recording billings)
Construction Expense	$3,772,000
Construction in progress (CIP)	$828,000
Construction Revenue		$4,600,000
(Being entry made for recording revenue)

c. Journal entries for the year 2023:

Account Titles and Explanations	Debit	Credit
Construction in progress (CIP)	$2,074,600
Various Accounts		$2,074,600
(Being entry made for recording cost incurred)
Accounts Receivable	$3,686,000
Billing on CIP		$3,686,000
(Being entry made for recording billings)
Cash	$4,390,000
Accounts Receivable		$4,390,000
(Being entry made for recording billings)
Construction Expense	$2,074,600
Construction in progress (CIP)	$225,400
Construction Revenue		$2,300,000
(Being entry made for recording revenue)
Billings on CIP	$10,000,000
Construction in Progress		$10,000,000
(Being entry made for finalisation and completion of project)