Question

On February 1, 2020, Joe agreed to construct a building at a contract price of $17,400. Joe estimated total construction costs would be $12,000 and the project would be finished in 2022. Information relating to the costs and billings for this contract is as follows:

                                                                             2020                       2021                      2022       

Total costs incurred to date                                        $4,500                    $7,920                  $13,800

Estimated costs to complete                                         7,500                      5,280                     -0-

Customer billings to date                                             6,600                    12,000                    16,800

Collections to date                                                      6,000                    10,500                    16,500

Instructions:

1. Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and for completed-contract accounting, show the gross profit that should be recorded for 2020, 2021, and 2022.

                        Percentage-of-Completion                                   Completed-Contract

                                    Gross Profit                                                   Gross Profit

            2020               ___________                            2020              ___________

            2021               ___________                            2021              ___________                 

            2022               ___________                            2022              ___________                 

2. Make the journal entries to record construction expense, construction revenue, and gross profit for the second year, 2021.
3. At the end of the 2021, the second year of construction, will the company report a current asset or a current liability? And how much?

Answer 1

a. The completed contract method is an accounting technique that lets taxpayers and businesses postpone the reporting of income and expenses, until after a contract is completed, even if cash payments were issued or received during a contract period. This accounting method is frequently used in the construction industry or other sectors that tend to involve long-term contracts. So all the profit or loss will be recognized in the year of completion of the project

The percentage of completion method of revenue recognition is a concept in accounting that refers to a method by which a business recognizes revenue on an ongoing basis depending on the stages of a project’s completion. In other words, the percentage of completion method is used for longer-term projects and recognizes revenue and expenses as a percentage of the project’s completion during the period.

Computation of Gross Profit under percentage of completion method:

				Amount in $
Particulars		2020	2021	2022
Cost incurred during the year	A	4,500	3,420	5,880
Cost incurred during previous year/years	B	-	4,500	7,920
Estimated cost still to be incurred	C	7,500	5,280	-
Total Cost	D=A+B+C	12,000	13,200	13,800
Percentage Completion till date	E=(A+B)/D	37.50%	60.00%	100.00%
Percentage work already completed till last year	F	0	37.50%	60.00%
Percentage revenue to be considered this year	G=E-F	37.50%	22.50%	40.00%
Revenue	$	6,525	3,915	6,960
	H=17400*G	(17,400*37.5%)	(17,400*22.5%)	(17,400*40%)
Expenses	$	4,500	3,420	5,880
Gross Profit		2,025	495	1,080

Therefore,

Year	Perecentage Completion Method
	Gross Profit/(Loss) Recognized
	$
2020	2,025
2021	495
2022	1,080
Total Project profit (Loss)	3,600

Year	Completed Contract Methd
	Gross Profit/(Loss) Recognized
	$
2020	-
2021	-
2022	3,600
	($17,400-$13,800)
Total Project profit (Loss)	3,600

b.

Journal Entries under the percentage of completion method for the Year 2021:

Account Titles and Explanations	Debit	Credit
CIP (construction in progress)	$3,420
Cash/ Accounts Payable		$3,420
(Being entry made for recording cost incurred)
Construction Expense	$3,420
Construction in progress (CIP)	$495
Construction Revenue		$3,915
(Being entry made for recording revenue)

c. Reporting of current asset or a current liability by the company under the percentage of completion method:

Particulars	2021
	$
Revenue Recognized till date	10,440
Billings till date	12,000
Billings in excess of Cost/ (Cost in excess of billing)	(1,560)

Balance Sheet (Partial)	2021
Current Assets:
Cost in excess of billing	-
Current liabilities:
Billings in excess of Cost	1,560