Question

Stoney Run Construction Company (U.S. GAAP) enters into a 3-year contract to build a new warehouse facility. Information for Years 1, 2, and 3 is shown below:

		Year 1	Year 2	Year 3
Sale price		$2,800,000	$2,800,000	$2,800,000
Estimated costs		1,600,000	2,000,000	2,000,000
Costs incurred to date (paid in cash)		400,000	900,000	2,000,000
Billed to date		250,000	1,150,000	2,800,000
Received in cash to date		190,000	950,000	2,800,000

COST RECOVERY METHOD (IFRS)

Question 1: Calculate the Gross Profit booked in Year 1:

Question 2: Book the following Journal Entries for Year 1:

1-Record Sale

2-Record payments received

Question 3: Book the following journal entries for Year 3:

1-Record payments received

2-Record gross profit

Answer 1

• All working forms part of the answer
• Working sheet

Working		Year 1	Year 2	Year 3
A	Contract Price	$       2,800,000.00	$ 2,800,000.00	$ 2,800,000.00
B	Cost Incurred to Date	$           400,000.00	$      900,000.00	$ 2,000,000.00
C	Estimated cost yet to be incurred to complete the contract	$       1,200,000.00	$ 1,100,000.00	$                        -
D = B+C	Total Cost	$       1,600,000.00	$ 2,000,000.00	$ 2,000,000.00
E = (D/B) x 100	% of Completion	25%	45%	100%
F = A x E	Revenue to date	$           700,000.00	$ 1,260,000.00	$ 2,800,000.00
G	Revenue of Previous year	$                            -	$      700,000.00	$ 1,260,000.00
H = F - G	Net Revenue this year	$           700,000.00	$      560,000.00	$ 1,540,000.00
I (=B)	Cost to date	$           400,000.00	$      900,000.00	$ 2,000,000.00
J	Cost to date of previous year	$                            -	$      400,000.00	$      900,000.00
K = I - J	Net Cost for the year	$           400,000.00	$      500,000.00	$ 1,100,000.00
L = H - K	Gross Profits	$           300,000.00	$        60,000.00	$      440,000.00

• Answers
• Question 1

Answer: Gross Profit Year 1 = $ 300,000 [calculated above]

• Question 2

Date	Accounts title	Debit	Credit
RECORD SALE	Accounts receivables	$ 250,000.00
	Billing on Construction contracts		$ 250,000.00
	(amount billed during the year)
Date	Accounts title	Debit	Credit
RECORD PAYMENT RECEIVED	Cash	$ 190,000.00
	Accounts receivables		$ 190,000.00
	(cash received)

• Question 3

Date	Accounts title	Debit	Credit
Payment received	Cash	$      1,850,000.00
	Accounts receivables		$ 1,850,000.00
	(cash received)
Date	Accounts title	Debit	Credit
Record Gross Profits	Construction in Progress	$          440,000.00
	Construction expenses	$      1,100,000.00
	Construction Revenue		$ 1,540,000.00
	(revenue recognised)