Question

Chiefs Construction Company has contracted to build an office building. The construction is scheduled to begin on January 1, 2020, and the estimated time of completion is July 1, 2023. The building cost is estimated to be $20,000,000 and will be billed at $24,000,000. The following data relate to the construction period:

	2020	2021	2022	2023
Cost to date	5,500,000	10,000,000	13,500,000	20,000,000
Estimated cost to complete	14,500,000	10,000,000	6,500,000	-0-
Progress billings to date	3,000,000	9,000,000	14,000,000	24,000,000
Cash collected to date	3,000,000	7,500,000	12,500,000	24,000,000

1) Compute the estimated gross profit for 2020, 2021, 2022, and 2023 assuming that the percentage-of-completion method is used.

2) Prepare the necessary journal entries for Chiefs Company for the years 2022 and 2023 under percentage-of-completion method.

3) Prepare the necessary journal entries for Chiefs Company for the years 2022 and 2023 under completed contract method.

Answer 1

solution 1

Calculation of Gross Profit

		Working	2020	2021	2022	2023
a	Cost to date(cumulative)		5,500,000	10,000,000	13,500,000	20,000,000
b	Estimated Total cost to complete		20,000,000	20,000,000	20,000,000	20,000,000
c	Billing		3,000,000	6,000,000	5,000,000	10,000,000
d	Cash collected		3,000,000	4,500,000	5,000,000	11,500,000
e	% Completed (a/b)	cost incurred to date /Estimated total cost	28	50	68	100
f	Revenue Recognised	(Contract price *percentage Of Completion) - Revenue Recognised Previously	6,600,000	5,400,000	4,200,000	7,800,000
g	Costs under the percentage of completion method:		5,500,000	4,500,000	3,500,000	6,500,000
h	Gross profit (f-g)		1,100,000	900,000	700,000	1,300,000

Solution 2

Journal Entries: Percentage of Completion Method

Journal Entries - Chiefs Company for the year 2022
as per Percentage-of-completion method.
Date	Particulars	Debit	Credit
1	Dr CIP( Work in progress)	$3,500,000.00
	Cr Accounts payable		$3,500,000.00
	(To record Incurring cost)
2	Dr Accounts Receivable a/c	$5,000,000.00
	Cr Billing on CIP		$5,000,000.00
	(To record billing)
3	Dr Cash A/c	$5,000,000.00
	Cr Accounts Receivable		$5,000,000.00
	(Being Received payment)
4	Dr Construction Expense	$3,500,000.00
	Dr CIP(Work in progress)	$700,000.00
	Cr construction Revenue		$4,200,000.00
	(for period end adjustment for revenue )
Journal Entries - Chiefs Company for the year 2023
as per Percentage-of-completion method.
Date	Particulars	Debit	Credit
1	Dr CIP( Work in progress)	$6,500,000.00
	Cr Accounts payable		$6,500,000.00
	(To record Incurring cost)
2	Dr Accounts Receivable a/c	$10,000,000.00
	Cr Billing on CIP		$10,000,000.00
	(To record billing)
3	Dr Cash A/c	$11,500,000.00
	Cr Accounts Receivable		$11,500,000.00
	(Being Received payment)
4	Dr Construction Expense	$6,500,000.00
	Dr CIP(Work in progress)	$1,300,000.00
	Cr construction Revenue		$7,800,000.00
5	Dr Billing	$24,000,000.00
	Cr CIP(Work in progress)		$24,000,000.00
	(For Completing the project )

Solution 3

Journal Entries: Percentage of Completion Method

Journal Entries - Chiefs Company for the year 2022
as per Percentage-of-completion method.
Date	Particulars	Debit	Credit
1	Dr CIP( Work in progress)	$3,500,000.00
	Cr Accounts payable		$3,500,000.00
	(To record Incurring cost)
2	Dr Accounts Receivable a/c	$5,000,000.00
	Cr Billing on CIP		$5,000,000.00
	(To record billing)
3	Dr Cash A/c	$5,000,000.00
	Cr Accounts Receivable		$5,000,000.00
	(Being Received payment)
4	For recording Revenue & Expense	NA	NA
Journal Entries - Chiefs Company for the year 2023
as per Percentage-of-completion method.
Date	Particulars	Debit	Credit
1	Dr CIP( Work in progress)	$6,500,000.00
	Cr Accounts payable		$6,500,000.00
	(To record Incurring cost)
2	Dr Accounts Receivable a/c	$10,000,000.00
	Cr Billing on CIP		$10,000,000.00
	(To record billing)
3	Dr Cash A/c	$11,500,000.00
	Cr Accounts Receivable		$11,500,000.00
	(Being Received payment)
4	Dr Billing	$24,000,000.00
	Cr Revenue		$24,000,000.00
	(For Recording Revenue )

5	Dr Construction Expense	$20,000,000.00
	Cr CIP(Work in progress)		$20,000,000.00
	(For Recording Expense)