Question

Gidget’s Development Corp. (GDC) is a publicly reportable enterprise. Its year end is December 31. In 20X5, it entered into a $25 million, long-term contract to construct a small office complex. The company’s management has determined that this is a single performance obligation settled over time and has elected to use the cost-to-cost input method to measure progress. Pertinent details of the construction progress follow:

( in '000s )	20X5	20X6*	20X7**
Costs incurred during the year	$7,000	$12,000	$6,500
Cumulative costs	7,000	19,000	25,500
Estimated costs to complete	13,000	7,000	0
Progress billing during the year	8,500	13,500	3,000
Collections during the year	6,900	12,600	5,500

*The revised cost data was not known before 20X6.
**The revised cost data was not known before 20X7

Required:
a) Prepare all required summary journal entries for 20X5.
b) Prepare all required summary journal entries for 20X6.
c) Prepare all required summary journal entries for 20X7.
d) Summarize the accounts and amounts (excluding cash) that will be reported on GDC’s statement of financial position as at December 31, 20X6, pertaining to this contract. Assume that all accounts payable have been paid.

Answer 1

Answer:

	20X5	20X6	20X7
Cost incurred till date	7000000	19000000	25500000
Estimated costs to complete	13000000	7000000	0
Total cost to complete	20000000	26000000	25500000
% of completion till date [cost incurred till date /total cost complete]	35	73.08	100
Contract Revenue	25000000	25000000	25000000
Gross profit on contract [contract revenue - Total cost to complete]	5000000	-1000000	-500000

  

	20X5	20X6	20X7
Gross profit to be recognized till date (Gross profit *% of completion)	1750000	-730769	-500000
less:Gross profit recognized in earlier years	0	1750000	-730769
Gross profit recognized in current year	1750000	-2480769	230769

       
  

Revenue to date(Total revenue*% OF COMPLETION)	8750000	18269231	25000000
Revenue previous year	0	8750000	18269231
Net revenue this year	8750000	9519231	6730769
Cost to date	7000000	19000000	25500000
Cost to date of previous year	0	7000000	19000000
Net cost of the year	7000000	12000000	6500000
Gross Profit	1750000	-2480769	230769

(a) Journal entry for 20x5
Date	Account title	Debit ($)	Credit ($)
1	construction in progress	7000000
	cash /Accounts payable		7000000
	(To record cost of construction)
2	Accounts receivable	8500000
	Billing on construction in progress		8500000
	(To record Billing)
3	cash	6900000
	Accounts receivable		6900000
	(To record Collections)
4	construction expense	7000000
	construction in progress	1750000
	construction revenue from long term Contract		8750000
	(To recognise revenue)

  
Working :

1)Construction cost during 20x5 = (7000000cost incurred till date -0 cost in prior year ) = 7000000

2)Billing during the year = 8500000-0 = 8500000

3)collection during the year = 6900000-0=268000

(b) Journal entry for 20x6
Date	Account title	Debit ($)	Credit ($)
1	construction in progress	12000000
	cash /Accounts payable		12000000
	(To record cost of construction)
2	Accounts receivable	13500000
	Billing on construction in progress		13500000
	(To record Billing)
3	cash	12600000
	Accounts receivable		12600000
	(To record Collections)
4	construction expense	12000000
	construction in progress		2480769
	construction revenue from long term Contract		9519231
	(To recognise revenue)

Working :

1)Construction cost during 20x6 = (19000000cost incurred till date -7000000 cost in prior year ) = 12000000

2)Billing during the year = 13500000

3)collection during the year = 12600000

(c)Journal entry for 20x7
Date	Account title	Debit ($)	Credit ($)
1	construction in progress	6500000
	cash /Accounts payable		6500000
	(To record cost of construction)
2	Accounts receivable	3000000
	Billing on construction in progress		3000000
	(To record Billing)
3	cash	5500000
	Accounts receivable		5500000
	(To record Collections)
4	construction expense	6500000
	construction in progress		230769
	construction revenue from long term Contract		6730769
	(To recognise revenue)

(d)

Summary of Accounts As on Dec-31,20x6:

Accounts Receivable(Assets)

(Total Billing - Total Collection)

=(8500000+13500000) - (6900000+12600000)

=2500000

Costruction in progress or Amount receivable or payable under contract

(Profit upto 20x6 + Cost incurred upto 20x6-Amount Billed upto date

=(-730769+19000000-22000000)

=-3730769 (Liability)