Question

In 2018, 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 2020. Information related to the contract is as follows:

	2018			2019			2020
Cost incurred during the year	$	2,400,000		$	3,600,000		$	2,200,000
Estimated costs to complete as of year-end		5,600,000			2,000,000			0
Billings during the year		2,000,000			4,000,000			4,000,000
Cash collections during the year		1,800,000			3,600,000			4,600,000

Westgate Construction uses the completed contract method of accounting for long-term construction contracts.

Required:
1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years.
2-a.In the journal below, complete the necessary journal entries for the year 2018 (credit "Various accounts" for construction costs incurred).
2-b.In the journal below, complete the necessary journal entries for the year 2019 (credit "Various accounts" for construction costs incurred).
2-c. In the journal below, complete the necessary journal entries for the year 2020 (credit "Various accounts" for construction costs incurred).
3. Complete the information required below to prepare a partial balance sheet for 2018 and 2019 showing any items related to the contract.
4. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information.

	2018			2019			2020
Cost incurred during the year	$	2,400,000		$	3,800,000		$	3,200,000
Estimated costs to complete as of year-end		5,600,000			3,100,000			0

5. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information.

	2018			2019			2020
Cost incurred during the year	$	2,400,000		$	3,800,000		$	3,900,000
Estimated costs to complete as of year-end		5,600,000			4,100,000			0

Answer 1

1) Revenue and Gross Profit (loss) under Completed Contract method:
	2018	2019	2020
Revenue booked	0	0	10000000
Expenses booked	0	0	8200000
Gross Profit (loss)	0	0	1800000
Note: Under the completed contract method, gross profit / loss is calculated in the final year of contract.
2a) Journal entries:
Year	2018
	A/c Title	Debit $'m	Credit $'m
Incurring costs	CIP	2.4
	Cash		2.4
Billing	Accounts Receivable	2
	Billing		2
Receiving payments	Cash	1.8
	Accounts Receivable		1.8
recording revenues	N/A
recording expenses	N/A
2b)
Year	2019
	A/c Title	Debit $'m	Credit $'m
Incurring costs	CIP	3.6
	Cash		3.6
Billing	Accounts Receivable	4
	Billing		4
Receiving payments	Cash	3.6
	Accounts Receivable		3.6
recording revenues	N/A
recording expenses	N/A
2c)
Year	2020
	A/c Title	Debit $'m	Credit $'m
Incurring costs	CIP	2.2
	Cash		2.2
Billing	Accounts Receivable	4
	Billing		4
Receiving payments	Cash	4.6
	Accounts Receivable		4.6
recording revenues	Billing	10
	Revenue		10
recording expenses	Construction Expense	8.2
	CIP		8.2

3)
Partial Balance Sheet:
	2018	2019
Assets:	Amount $'m	Amount $'m
Current Assets:
Accounts Receivable	0.2	0.6
Cash	-0.6	-0.6
Long term assets:
Construction in Process	2.4	6
	2018	2019
Liabilities:	Amount $'m	Amount $'m
Revenues:
Billing	2	6
4) Revenue and Gross Profit (loss) under Completed Contract method:
	2018	2019	2020
Revenue booked	0	0	10000000
Expenses booked	0	0	9400000
Gross Profit (loss)	0	0	600000
Note: Under the completed contract method, gross profit / loss is calculated in the final year of contract.
5) Revenue and Gross Profit (loss) under Completed Contract method:
	2018	2019	2020
Revenue booked	0	0	10000000
Expenses booked	0	0	10100000
Gross Profit (loss)	0	0	-100000
Note: Under the completed contract method, gross profit / loss is calculated in the final year of contract.