Question

Tullis Construction enters into a long-term fixed price contract to build an office tower for $10,000,000. In the first year of the contract Tullis incurs $3,000,000 of cost and the engineers determined that the remaining costs to complete are $5,000,000. Tullis billed $4,000,000 in year 1 and collected $3,500,000 by the end of the end of the year.

Answer 1

Formula sheet

A	B	C	D	E	F	G	H	I	J
2		1)
3		Contract Value	10000000
4		Revenue recognized over the years can be calculated using percentage completion method.
5		Revenue recognized in a year= (% of project completed during the year*Total Contract Value) - Revenue recognized till previous years
6		% of project completed in a year = Cumulative Expenditure incurred till the year / Total estimated cost of contract.
7
8		Revenue recognized upon completion is the total contract value.
9
10		Gross profit in a period = Revenue recognized - Cost incurred in the year
11
12			Cost incurred during the year	Cumulative cost	Estimated cost to complete
13		Situation	Year1	Year1	Year1
14		1	3000000	=D14	5000000
15
16
17		For Situation 1 revenue recognized over the years can be calculated as follows:
18
19		Situation	Year1
20		Contract Price	=$D$3
21		Less:
22		Cost incurred to date	=E14
23		Estimated Further Cost	=F14
24		Estimated total cost	=D22+D23
25
26		Percentage of completion = Cost incurred to date / Estimated total cost	=D22/D24	=D22/D24
27
28		Revenue Recognized	=D20*D26
29		Cost incurred during the year	=D14
30		Gross Profit	=D28-D29
31
32
33
34		Given the following data:	Year1
35		Cost incurred during the year	=D14
36		Estimated cost to complete as of year end	=F14
37		Billings during the year	4000000
38		Cash Collections during the year	3500000
39		Revenue recognized	=D28
40		Gross Profit	=D30
41
42		Journal Entries will be as follows:
43
44		1)
45		Record Cost Incurred
46		Account	Debit	Credit
47		Construction in progress	=E48
48		Cash		=D35
49
50		2)
51		Record Billing on Contract
52		Account	Debit	Credit
53		Account Receivables	=E54
54		Billings on construction contract		=D37
55
56		3)
57		Record Payment Received
58		Account	Debit	Credit
59		Cash	=D38
60		Account Receivables		=D59
61
62		4)
63		Record revenue/cost during construction period
64		Account	Debit	Credit
65		construction in progress	=E67-D66
66		construction Expense	=D35
67		construction Revenue		=D39
68
69
70		Balance Sheet:
71
72		Account Receivables = Billings - Cash Collection
73		Construction in process = Cost incurred + Gross Profit
74		If construction in progress is in excess of Billings then cost and profit in excess of billings is an asset
75		whereas if the construction in progress is in smaller than billings then billings in excess of cost and profit is an liability.
76
77
78		Balance sheet will be as follows:
79		Current Assets	Year1
80		Account Receivables		=D37-D38
81		Consruction in progress	=D35+D40
82		Less:Billings	=D37
83		Cost and profit in excess of billings		=MAX(D81-D82,0)
84		Current Liabilities
85		Billings in excess of cost and profit		=MAX(D82-D81,0)
86