Question

Essan Construction Inc., which has a calendar year end, has entered into a non-cancellable fixed price contract for $2.8 million beginning September 1, 2020, to build a road for a municipality. It has been estimated that the road construction will be complete by June 2022. The following data pertain to the construction period.

	2020	2021	2022
Cost to date	$800,000	$1,800,000	$2,3500,000
Estimated costs to complete	$1,700,000	$600,000	0
Progress billings to date (non-refundable)	$850,000	$2,300,000	$2,800,000
Cash collected to date	$700,000	$2,200,000	$2,800,00

(A) Using the percentage-of-completion method, calculate the estimated gross profit that would be recognized during each year of the construction period. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

	2020	2021	2022
Gross profit / (loss)	$	$	$

(B) Using the percentage-of-completion method, prepare the journal entries for 2020 and 2021. (Use Materials, Cash, Payables for costs incurred to date.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

For Year 2020:

Account Titles and Explanations	Debit	Credit
(To record cost of construction)
(To record progress billings)
(To record collections)
(To record revenues)
(To record construction expenses)

For Year 2021:

Account Titles and Explanation	Debit	Credit
(To record cost of construction)
(To record progress billings)
(To record collections)
(To record revenues)
(To record construction expenses)

(C) Using the percentage-of-completion method, what is the balance in the Contract Asset/Liability account at December 31, 2020 and 2021? (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

	December 31,2020	December 31, 2021
Balance in the Contract Asset/Liability account	$	$

(D)

Answer 1

ANSWER

Essan Construction Inc.
A)	Calculation of Gross Profit
Particulars	2020	2021	2022
Contract Price	2,800,000	2,800,000	2,800,000	A
Cost Incurred to date	800,000	1,800,000	2,350,000	D
Estimated cost to complete	1,700,000	600,000	-	C
Cost Incurred during the year	800,000	1,000,000	550,000	B
Estimated total cost	2,500,000	2,400,000	2,350,000	E=C+D
Percentage complete	32.00%	75.00%	100.00%	F=D/E
(Cost Incurred to date/Estimated total cost)
Revenue to be recognized	896,000	1,204,000	700,000	G
(Contract Price*Percentage complete)- revenue previously recognized
Year 2020: 32% completed. Revenue recognized = 32% x $ 2,800,000 = $ 896,00.
Year 2021: 75% completed. Revenue recognized = 75% x $ 2,800,000 – $ 896,000 (previously recognized) = $ 1,204,000.
Year 2022: 100% completed. Revenue recognized = 100% x $ 2,800,000 – $ 896,00- $ 1,204,000 (previously recognized) = $ 700,000.
Gross Profit/(Loss)	96,000	204,000	150,000	H=G-B
Billings to date	850,000	2,300,000	2,800,000
Billings during the year	850,000.00	1,450,000.00	500,000.00
Cash collection to date	700,000	2,200,000	2,800,000
Collection during the year	700,000.00	1,500,000.00	600,000.00

		2020		2021
B)	Journal Entries	Debit $	Credit $		Debit $	Credit $
Costs Incurred	CIP (Work-in-progress)	800,000			1,000,000
	Cash		800,000			1,000,000
Billing	Accounts Receivable	850,000			1,450,000
	Billing on CIP		850,000			1,450,000
Receiving Payments	Cash	700,000			1,500,000
	Accounts Receivable		700,000			1,500,000
Period end adjustments for Revenue	Construction Expense	800,000
(Gross Profit entry)	CIP (Work-in-progress)	96,000
	Construction Revenue		896,000
Period end adjustments for Revenue	Construction Expense				1,000,000
(Gross Profit entry)	CIP (Work-in-progress)				204,000
	Construction Revenue					1,204,000

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