In: Accounting
PRACTICAL QUESTION
Tiger Construction Ltd signs a contract on 1 May 2018 to build a theme park. The construction is scheduled to commence on 1 July 2018 and the estimated date of completion is 30 June 2021. The total contract price is $5m and the cost of the park is initially estimated at $4.5m. The following data relates to the construction period:
For the year ended 30 June |
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2019 |
2020 |
2021 |
|
$ |
$ |
$ |
|
Costs to date |
1,700,000 |
3,000,000 |
4,800,000 |
Estimated costs to complete |
2,800,000 |
1,700,000 |
- |
Progress billings to date |
1,400,000 |
2,600,000 |
5,000,000 |
Cash received to date |
1,200,000 |
2,200,000 |
5,000,000 |
Assume that cost (an input measure) is used as the basis for assessing progress on the construction contract.
Required
Determine the percentage of completion for 2019, 2020 and 2021.
2019 |
2020 |
2021 |
|
$ |
$ |
$ |
|
Costs to date (A) |
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Estimated costs to complete (B) |
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Estimated total cost (A+B=C) |
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Percent of completion (POC=A/C) |
Calculate revenue and gross profit for 2019, 2020 and 2021.
2019 |
2020 |
2021 |
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$ |
$ |
$ |
|||||
Contract Price |
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Contact Price x POC |
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Less Revenue recognised in previous years |
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= Revenue recognised for the year |
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Less Costs for the year |
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= Gross profit for the year |
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Using the percentage of completion method, provide the journal entries for 2019, 2020 and 2021.
2019 $m |
2020 $m |
2021 $m |
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(i) |
To record costs incurred: |
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(ii) |
To record billings to customers: |
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(iii) |
To record cash collections: |
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(iv) |
To record periodic income recognised: |
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Percentage of completion
2019 |
2020 |
2021 |
|
$ |
$ |
$ |
|
Costs to date (A) |
$ 17,00,000 |
$ 30,00,000 |
$ 48,00,000 |
Estimated costs to complete (B) |
$ 28,00,000 |
$ 17,00,000 |
$ - |
Estimated total cost (A+B=C) |
$ 45,00,000 |
$ 47,00,000 |
$ 48,00,000 |
Percent of completion (POC=A/C) |
38% |
64% |
100% |
Revenue and gross profit for 2019, 2020 and 2021
2019 |
2020 |
2021 |
|
$ |
$ |
$ |
|
Contract Price |
$ 50,00,000 |
$ 50,00,000 |
$ 50,00,000 |
Contact Price x POC |
$18,88,888.89 |
$31,91,489.36 |
$50,00,000.00 |
Less Revenue recognised in previous years |
$ - |
$ 18,88,889 |
$ 31,91,489 |
Revenue recognised for the year |
$ 18,88,889 |
$ 13,02,600 |
$ 18,08,511 |
Less Costs for the year |
$ 17,00,000 |
$ 13,00,000 |
$ 18,00,000 |
Gross profit for the year |
$ 1,88,889 |
$ 2,600 |
$ 8,511 |
Journal entries for recording revenue |
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2019 |
2020 |
2021 |
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Debit |
Credit |
Debit |
Credit |
Debit |
Credit |
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1 |
Construction in progress |
$ 17,00,000 |
$ 13,00,000 |
$ 18,00,000 |
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Cash |
$ 17,00,000 |
$ 13,00,000 |
$ 18,00,000 |
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2 |
Accounts receivable |
$ 14,00,000 |
$ 12,00,000 |
$ 24,00,000 |
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Billings on construction contract |
$ 14,00,000 |
$ 12,00,000 |
$ 24,00,000 |
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3 |
Cash |
$ 12,00,000 |
$ 10,00,000 |
$ 28,00,000 |
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Accounts receivable |
$ 12,00,000 |
$ 10,00,000 |
$ 28,00,000 |
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4 |
Construction in progress |
$ 1,88,889 |
$ 2,600 |
$ 8,511 |
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Construction expense |
$ 17,00,000 |
$ 13,00,000 |
$ 18,00,000 |
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Construction revenue |
$ 18,88,889 |
$ 13,02,600 |
$ 18,08,511 |