Question

Problem 6-10 (Algo) Long-term contract; revenue recognition over time [LO6-8, 6-9]

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In 2021, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2023. Information related to the contract is as follows:

	2021			2022			2023
Cost incurred during the year	$	2,490,000		$	3,984,000		$	2,008,600
Estimated costs to complete as of year-end		5,810,000			1,826,000			0
Billings during the year		2,030,000			4,444,000			3,526,000
Cash collections during the year		1,815,000			3,900,000			4,285,000

Westgate recognizes revenue over time according to percentage of completion.

Problem 6-10 (Algo) Part 1

Required:
1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years. (Do not round intermediate calculations. Loss amounts should be indicated with a minus sign.

2-a. In the journal below, complete the necessary journal entries for the year 2021 (credit "Various accounts" for construction costs incurred).
2-b. In the journal below, complete the necessary journal entries for the year 2022 (credit "Various accounts" for construction costs incurred).
2-c. In the journal below, complete the necessary journal entries for the year 2023 (credit "Various accounts" for construction costs incurred).

Answer 1

Requirement 1
	2021	2022	2023
Revenue	$3,000,000	$4,800,000	$2,200,000
Gross Profits (Loss)	$510,000	$816,000	$191,400

--Working

Working		2021	2022	2023
A	Contract Price	$10,000,000	$10,000,000	$10,000,000
B	Cost Incurred to Date	$2,490,000	$6,474,000	$8,482,600
C	Estimated cost yet to be incurred to complete the contract	$5,810,000	$1,826,000	$0
D = B+C	Total Cost	$8,300,000	$8,300,000	$8,482,600
E = (B/D) x 100	% of Completion	30.00%	78.00%	100.00%
F = A x E	Revenue to date	$3,000,000	$7,800,000	$10,000,000
G	Revenue of Previous year	$0	$3,000,000	$7,800,000
H = F - G	Net Revenue this year	$3,000,000	$4,800,000	$2,200,000
I (=B)	Cost to date	$2,490,000	$6,474,000	$8,482,600
J	Cost to date of previous year	$0	$2,490,000	$6,474,000
K = I - J	Net Cost for the year	$2,490,000	$3,984,000	$2,008,600
L = H - K	Gross Profits	$510,000	$816,000	$191,400

Requirement 2A
Date	Accounts title	Debit	Credit
2021	Construction in Progress	$2,490,000
	Various accounts		$2,490,000
	(construction cost incurred)
2021	Accounts receivables	$2,030,000
	Billing on Construction contracts		$2,030,000
	(amount billed during the year)
2021	Cash	$1,815,000
	Accounts receivables		$1,815,000
	(cash received)
2021	Construction in Progress	$510,000
	Cost of construction	$2,490,000
	Revenue from Long Term contract		$3,000,000
	(revenue recognised)
Requirement 2B
Date	Accounts title	Debit	Credit
2022	Construction in Progress	$3,984,000
	Various accounts		$3,984,000
	(construction cost incurred)
2022	Accounts receivables	$4,444,000
	Billing on Construction contracts		$4,444,000
	(amount billed during the year)
2022	Cash	$3,900,000
	Accounts receivables		$3,900,000
	(cash received)
2022	Construction in Progress	$816,000
	Cost of construction	$3,984,000
	Revenue from Long Term contract		$4,800,000
	(revenue recognised)
Requirement 2C
Date	Accounts title	Debit	Credit
2023	Construction in Progress	$2,008,600
	Various accounts		$2,008,600
	(construction cost incurred)
2023	Accounts receivables	$3,526,000
	Billing on Construction contracts		$3,526,000
	(amount billed during the year)
2023	Cash	$4,285,000
	Accounts receivables		$4,285,000
	(cash received)
2023	Construction in Progress	$191,400
	Cost of construction	$2,008,600
	Revenue from Long Term contract		$2,200,000
	(revenue recognised)
2023	Billing on Construction contracts	$10,000,000
	Construction in Progress		$10,000,000
	(to record completion of contract)