Question

Ipswich Construction Company is a private company that follows ASPE. The company has a December 31 year-end. Ipswich commenced business operations on January 1, 2020. The company’s board of directors is currently meeting to choose between use of the completed-contract method and use of the percentage-of-completion method for reporting long-term construction contracts in its financial statements. You have been engaged to assist the company’s controller at the board meeting and have been provided with the following information:

construction activities for the year ended december 31, 2020

                                        Total Contract          Billings Through     Cash Collections

         Project                           Price                          12/31/20          Through 12/31/20

            A                           $   615,000                   $ 340,000               $   310,000

            B                                450,000                       135,000    135,000

            C                                475,000                       475,000    390,000

            D                                600,000                       240,000    160,000

            E                                 480,000                       400,000                      400,000

                                          $2,620,000                  $1,590,000            $1,395,000

                                         Contract Costs               Estimated

                                      Incurred Through     Additional Costs to

         Project                        12/31/20              Complete Contract

            A                           $   510,000                     $120,000

            B                                130,000                       260,000

            C                                350,000                               -0-

            D                                370,000                       290,000

            E                                 320,000                         80,000

                                          $1,680,000                     $750,000

Each contract is with a different customer and any work remaining to be done on contracts is expected to be completed in 2021.

Required:

1. Assume Ipswich Construction Company follows the completed contract method. Calculate the amount of gross profit/(loss) to be recorded for each project for 2020. If no gross profit/(loss) is to be recorded for a given project, enter a zero. Enter your answers in the table provided.

2. Assume Ipswich Construction Company follows the percentage of completion method. Calculate the amount of gross profit/(loss) to be recorded for each project for 2020. If no gross profit/(loss) is to be recorded for a given project, enter a zero. Enter your answers in the table provided.

3. Prepare the general journal entry to record revenue and gross profit on Project B for 2020, assuming that the company decides to follow the percentage-of-completion method.

            Note:   Supporting calculations must be shown.

Answer 1

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Percentage of Completion

The percentage of completion method allows for the recognition of revenues, expenses, and taxes during the period that a contract is being executed. Through frequent reporting, percentage reporting reduces the risk of fluctuations while affording tax deferral benefits.

The percentage of completion method must be used if the revenues and costs of a project can be reasonably estimated and the parties involved are expected to be able to complete all duties.

Completed Contract

The completed contract method (CCM) of accounting considers all income and expenses directly related to a long-term contract as received when work is completed. The date of completion is spelled out in the contract and is often months or even years away from the date work begins.

Though a construction company may enjoy a break from taxes during the working phase—and sometimes may even qualify for certain tax incentives in the meantime—this method can be a riskier way to account for operations.

Note 1 : Completed contract method

Projects	A	B	C	D	E
Contract price (1)	615,000	450,000	475,000	600,000	480,000
Contract costs incurred	510,000	130,000	350,000	370,000	320,000
Additional Costs to complete	120,000	260,000	0	290,000	80,000
Total cost (2)	6,30,000	3,90,000	3,50,000	6,60,000	4,00,000
Total gross profit or (loss) (1-2)	(15,000)	60,000	1,25,000	(60,000)	80,000

a) The amount reported as income (loss) under the completed-contract method for 2020 is:

Project A	(15,000)
Project B	0 ( Since anticipated Profit is not booked )
Project C	125,000 ( This is already complete , since additional cost is ‘ 0 ‘ )
Project D	(11,000)
Project E	0 ( Since anticipated Profit is not booked )
Total	99000

b) The amount reported as income (loss) under the percentage-of-completion for 2020 is:

Project A	(15,000)
Project B	20000 [ (60,000 * 130,000 ) / 3,90,000 ]
Project C	125,000 ( This is already complete , since additional cost is ‘ 0 ‘ )
Project D	(11,000)
Project E	64000 [ (80,000 * 320,000 ) / 400000 ]
Total	183000

Formula in case of profit = (gross profit * cost incurred in 2020 ) / Total Estimated cost

c)

Accounts title and Explanation	Debit ($)	Credit ($)
Construction in Process	20000
Construction Expenses	130,000
Revenue from Long-term Contracts		150,000