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PRACTICAL QUESTION    Tiger Construction Ltd signs a contract on 1 May 2018 to build a...

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

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)

Estimated costs to complete (B)

Estimated total cost (A+B=C)

Percent of completion (POC=A/C)

Calculate revenue and gross profit for 2019, 2020 and 2021.                          

2019

2020

2021

$

$

$

Contract Price

Contact Price x POC

Less Revenue recognised in previous years

= Revenue recognised for the year

Less Costs for the year

= Gross profit for the year

Using the percentage of completion method, provide the journal entries for 2019, 2020 and 2021.                                                                                                              

2019

$m

2020

$m

2021

$m

(i)

To record costs incurred:

(ii)

To record billings to customers:

(iii)

To record cash collections:

(iv)

To record periodic income recognised:

Solutions

Expert Solution

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

2019

2020

2021

Debit

Credit

Debit

Credit

Debit

Credit

1

Construction in progress

$ 17,00,000

$ 13,00,000

$ 18,00,000

Cash

$ 17,00,000

$ 13,00,000

$ 18,00,000

2

Accounts receivable

$ 14,00,000

$ 12,00,000

$ 24,00,000

Billings on construction contract

$ 14,00,000

$ 12,00,000

$ 24,00,000

3

Cash

$ 12,00,000

$ 10,00,000

$ 28,00,000

Accounts receivable

$ 12,00,000

$ 10,00,000

$ 28,00,000

4

Construction in progress

$   1,88,889

$         2,600

$         8,511

Construction expense

$ 17,00,000

$ 13,00,000

$ 18,00,000

Construction revenue

$ 18,88,889

$ 13,02,600

$ 18,08,511

ekkarill92 answered 2 years ago
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