Question

The board of directors of Sheridan Construction Company is meeting to choose between the completed-contract method and the percentage-of-completion method of accounting for long-term contracts in the company's financial statements. You have been engaged to assist Sheridan's controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information: 1. Sheridan commenced doing business on January 1, 2021. 2. Construction activities for the year ended December 31, 2021, were as follows: Project Total Contract Price Billings Through 12/31/21 Cash Collections Through 12/31/21 Contract Costs Incurred Through 12/31/21 Estimated Additional Costs to Complete Contracts A $  495,000 $  335,000 $  305,000 $  419,000 $  96,000 B 715,000 205,000 205,000 187,500 437,500 C 472,500 470,000 385,000 345,000 -0- D 197,500 95,000 62,500 118,000 92,000 E 445,000 395,000 395,000 315,000 78,750 $2,325,000 $1,500,000 $1,352,500 $1,384,500 $704,250 3. Each contract is with a different customer. 4. Any work remaining to be done on the contracts is expected to be completed in 2022.

Compute the amount of income (or loss) before selling, general, and administrative expenses for the year ended December 31, 2021, which would be reported under: (1) The completed-contract method. $ (2) The percentage-of-completion method (based on estimated costs). $ SHOW LIST OF ACCOUNTS

Prepare the general journal entry to record revenue and gross profit on project B (second project) for 2021, assuming that the percentage-of-completion method is used. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit SHOW LIST OF ACCOUNTS

Indicate the balances that would appear in the balance sheet at December 31, 2021 for the following accounts for Project D (fourth project), assuming that the percentage-of-completion method is used. Accounts Receivable $ Billings on Construction in Process $ Construction in Process $ SHOW LIST OF ACCOUNTS

How would the balances in the accounts discussed in part (c) change (if at all) for Project D (fourth project), if the completed-contract method is used? If the completed-contract method is used the account balances would increasewould decreasewould be the same .

Answer 1

Solution:

a)

Projects	A	B	C	D	E
Contract price (a)	$495,000	$715,000	$472,500	$197,500	$445,000
Contract costs incurred	$419,000	$187,500	$345,000	$118,000	$315,000
Additional costs to complete	$96,000	$437,500	$0	$92,000	$78,750
Total cost (b)	$515,000	$625,000	$345,000	$210,000	$393,750
Total gross profit or loss (a - b)	($20,000)	$90,000	$127,500	($12,500)	$51,250

1)The amount reported as income (loss) under the completed-contract method for 2021 is:

Project A	($20,000)
Project B	$0
Project C	$127,500
Project D	($12,500)
Project E	$0
	$95,000

2)The amount reported as income (loss) under the percentage-of-completion method for 2021 is:

Project A	($20,000)
Project B($90,000 *$187,500)/ $625,000	$27,000
Project C	$127,500
Project D	($12,500)
Project E($51,250 *$315,000)/$393,750	$41,000
	$163,000

b)

Date	Account title and explanation	Debit	Credit
	Construction in process	$27,000
	Construction expenses	$187,500
	Revenue from long term contracts		$214,500

c)

Particulars	Amount
Billings	$95,000
Less: Cash collections	($62,500)
Accounts receivable	$32,500
Billings on construction in process	$95,000
Costs incurred	$118,000
Less: Loss reported	($12,500)
Construction in process	$105,500

d)

The account balances would be the same.

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