Question

Question # 2 — Percentage-of-completion method.

Arshdeep Builders contracted to build a high-rise for $35,000,000. Construction began in 2018 and is

expected to be completed in 2020. Data for 2018 and 2019 are:

Costs incurred to date Estimated costs to complete

Arshdeep uses the percentage-of-completion method.

Instructions

2018 $4,500,000 18,000,000

2019 $13,000,000

12,000,000

(a) How much gross profit should be reported for 2018? Show your computation.

(b) How much gross profit should be reported for 2019?

(c) Make the journal entry to record the revenue and gross profit for 2019.

Answer 1

Given that Contract Price is $35,000,000. Now for the purpose of solution, following calculations have been made,

Calculation of year-wise Revenue and Gross Profit:

	2018	2019
Costs Incurred to date	$ 4500000	$ 13000000
Estimated costs to complete	$ 18000000	$ 12000000
Total Costs	$ 22500000	$ 25000000
Percentage of Completion	20%	52%
Total Revenue to be recognized	$ 7000000	$ 18200000
Less: Revenue for prior year		$ 7000000
Revenue for Current Year	$ 7000000	$ 11200000
Less: Current Year Costs	$ 4500000	$ 8500000
Gross Profit to be recognized	$ 2500000	$ 2700000

1.Percentage of Completion = (Current Costs / Total Costs)

2018 = $ 4500000 / $ 22500000 = 20%

2019 = $ 13000000 / $ 22500000 = 52%

2.Total Revenue to be recognized = (Percentage x Contract Price)

2018 = $35,000,000 x 20% = $ 70,00,000

2019 = $35,000,000 x 52% = $ 18200000

3.Cost for 2019 = $13000000 - $4500000 = $8500000

Therefore,

(a) In the year 2018, gross profit to be reported amounting to $2500000.

(b) In the year 2019, gross profit to be reported amounting to $2700000.

(c) Journal entries shall be passed as follows,

Year	Particulars	Debit ($)	Credit ($)
2018	Construction in Progress A/c	2500000
	Cost of Construction A/c	4500000
	Revenue from Long-term Contracts A/c		7000000
	(Being Revenue and gross profit for the year 2018 recognized)
2019	Construction in Progress A/c	2700000
	Cost of Construction A/c	8500000
	Revenue from Long-term Contracts A/c		11200000
	(Being Revenue and gross profit for the year 2019 recognized)