Question

During 2015, Nilsen Company started a construction job with a contract price of $3,200,000. The job was completed in 2017. The following information is available:
2015 2016 2017
Costs incurred to date $ 800,000 $1,650,000 $2,140,000
Estimated costs to complete 1,200,000 550,000 -0-
Billings to date 600,000 1,800,000 3,200,000
Collections to date 540,000 1,620,000 2,850,000
Required:
a. Prepare all the necessary accounting entries for 2015, 2016 &2017, assuming the percentage-of-completion method is used.
b. Prepare all the necessary accounting entries for 2015, 2016 &2017, assuming the cost-recovery method is used.

Answer 1

Given in question,
Contract price		3,200,000
Start year		2015
End year		2016
Amounts in $		2015	2016	2017
Costs incurred to date		$ 800,000	$1,650,000	$2,140,000
Estimated costs to complete		1,200,000	550,000	-
Billings to date		600,000	1,800,000	3,200,000
Collections to date		540,000	1,620,000	2,850,000

Step 1: Calculation of percentage of completion for each year

Amounts in $	Note	2015	2016	2017
Costs incurred to date	A	800,000	1,650,000	2,140,000
Add: Estimated costs to complete	B	1,200,000	550,000	-
Estimated total costs	C = A + B	2,000,000	2,200,000	2,140,000
Percentage of completion	D = A / C	40%	75%	100%
Step 2: Calculation of revenue for each year
Amounts in $	Note	2015	2016	2017
Revenue up to date	E = D X contract price [i.e. 3,200,000]	1,280,000	2,400,000	3,200,000
Less: Revenue up to previous year		-	(1,280,000)	(2,400,000)
Revenue fro the year	F	1,280,000	1,120,000	800,000
Step 2: Calculation of Gross profit
Amounts in $	Note	2015	2016	2017
Costs incurred to date	Given in question	800,000	1,650,000	2,140,000
Less: Cost up to previous year	Given in question		(800,000)	(1,650,000)
Cost for the year	G	800,000	850,000	490,000
Gross profit	H = F - G	480,000	270,000	310,000
Incurring costs		2015	2016	2017	Note
Contract in progress (Work-in-progress)	Debit	800,000	850,000	490,000	See Note G
Accounts payable	Credit	800,000	850,000	490,000	See Note G
[Being cost for the year recorded]
Billing
Accounts receivables	Debit	600,000	1,200,000	1,400,000	Cumulative billing in question of current year
Billing of CIP (Revenue)	Credit	600,000	1,200,000	1,400,000	Less: Cumulative billing in question of previous year
[Being invoice raised to customer accounted for]					Please note this is not revenue recognition. Only invoice is being booked at this stage
Receiving payments
Cash/Bank	Debit	540,000	1,080,000	1,230,000	Cumulative collection in question of current year
Accounts receivables	Credit	540,000	1,080,000	1,230,000	Less: Cumulative collection in question of previous year
[Being amount received from customer accounted for]
Period-end adjustment for revenue [ Percentage completion method]
Contract in progress (Work-in-progress)	Debit	480,000	270,000	310,000	See note H
Construction expenses	Debit	800,000	850,000	310,000	See note G
Construction revenue	Credit	1,280,000	1,120,000	800,000	See note F
[Being revenue, expenses and gross profit booked as per calculation]
Completing the project
Billing of CIP (Revenue)	Debit			3,200,000
Contract in progress (Work-in-progress)	Credit			3,200,000
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