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	$	2,291,000			$	3,555,000			$	2,259,400
Estimated costs to complete as of year-end		5,609,000				2,054,000				0
Billings during the year		1,900,000				3,946,000				4,154,000
Cash collections during the year		1,700,000				3,500,000				4,800,000

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	$	2,510,000			$	3,855,000			$	3,210,000
Estimated costs to complete as of year-end		5,710,000				3,210,000				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	$	2,510,000			$	3,855,000			$	4,065,000
Estimated costs to complete as of year-end		5,710,000				4,210,000				0

Answer 1

• All working forms part of the answer

Requirement 1
	2018	2019	2020
Revenue	$       2,900,000.00	$       4,500,000.00	$          2,600,000.00
Gross Profits (Loss)	$           609,000.00	$          945,000.00	$              340,600.00

--Working

Working		2018	2019	2020
A	Contract Price	$     10,000,000.00	$    10,000,000.00	$        10,000,000.00
B	Cost Incurred to Date	$       2,291,000.00	$       5,846,000.00	$          8,105,400.00
C	Estimated cost yet to be incurred to complete the contract	$       5,609,000.00	$       2,054,000.00	$                                -
D = B+C	Total Cost	$       7,900,000.00	$       7,900,000.00	$          8,105,400.00
E = (B/D) x 100	% of Completion	29.00%	74.00%	100.00%
F = A x E	Revenue to date	$       2,900,000.00	$       7,400,000.00	$        10,000,000.00
G	Revenue of Previous year	$                            -	$       2,900,000.00	$          7,400,000.00
H = F - G	Net Revenue this year	$       2,900,000.00	$       4,500,000.00	$          2,600,000.00
I (=B)	Cost to date	$       2,291,000.00	$       5,846,000.00	$          8,105,400.00
J	Cost to date of previous year	$                            -	$       2,291,000.00	$          5,846,000.00
K = I - J	Net Cost for the year	$       2,291,000.00	$       3,555,000.00	$          2,259,400.00
L = H - K	Gross Profits	$           609,000.00	$          945,000.00	$              340,600.00

• Requirement 2

Requirement 2A
Date	Accounts title	Debit	Credit
2018	Construction in Progress	$           2,291,000.00
	Various accounts		$      2,291,000.00
	(construction cost incurred)
2018	Accounts receivables	$           1,900,000.00
	Billing on Construction contracts		$      1,900,000.00
	(amount billed during the year)
2018	Cash	$           1,700,000.00
	Accounts receivables		$      1,700,000.00
	(cash received)
2018	Construction in Progress	$               609,000.00
	Cost of construction	$           2,291,000.00
	Revenue from Long Term contract		$      2,900,000.00
	(revenue recognised)

Requirement 2B
Date	Accounts title	Debit	Credit
2019	Construction in Progress	$        3,555,000.00
	Various accounts		$ 3,555,000.00
	(construction cost incurred)
2019	Accounts receivables	$        3,946,000.00
	Billing on Construction contracts		$ 3,946,000.00
	(amount billed during the year)
2019	Cash	$        3,500,000.00
	Accounts receivables		$ 3,500,000.00
	(cash received)
2019	Construction in Progress	$           945,000.00
	Cost of construction	$        3,555,000.00
	Revenue from Long Term contract		$ 4,500,000.00
	(revenue recognised)

Requirement 2C
Date	Accounts title	Debit	Credit
2020	Construction in Progress	$      2,259,400.00
	Various accounts		$ 2,259,400.00
	(construction cost incurred)
2020	Accounts receivables	$      4,154,000.00
	Billing on Construction contracts		$ 4,154,000.00
	(amount billed during the year)
2020	Cash	$      4,800,000.00
	Accounts receivables		$ 4,800,000.00
	(cash received)
2020	Construction in Progress	$          340,600.00
	Cost of construction	$      2,259,400.00
	Revenue from Long Term contract		$ 2,600,000.00
	(revenue recognised)

• Requirement 3

Requirement 3
Balance Sheet [Partial]	2018		2019
Current Assets:
Accounts receivables		$          200,000.00		$          646,000.00
Construction in progress	$       2,900,000.00		$          7,400,000.00
Less: Billings	$     (1,900,000.00)		$        (5,846,000.00)
Costs and profits in excess of billings		$       1,000,000.00		$      1,554,000.00
Current Liabilities:
Accounts Payable		$                            -		$                            -

• Requirement 4

	2018	2019	2020
Revenue	$                      3,053,528	$                     3,593,992	$                          3,352,480
Gross Profit (Loss)	$                         543,528	$                       (118,528)	$                                         -

Working		2018	2019	2020
A	Contract Price	$             10,000,000.00	$             10,000,000.00	$                  10,000,000.00
B	Cost Incurred to Date	$                2,510,000.00	$               6,365,000.00	$                    9,575,000.00
C	Estimated cost yet to be incurred to complete the contract	$                5,710,000.00	$               3,210,000.00	$                                         -
D = B+C	Total Cost	$                8,220,000.00	$               9,575,000.00	$                    9,575,000.00
E = (B/D) x 100	% of Completion	30.54%	66.48%	100.00%
F = A x E	Revenue to date	$                3,053,527.98	$               6,647,519.58	$                  10,000,000.00
G	Revenue of Previous year	$                                     -	$               3,053,527.98	$                    6,647,519.58
H = F - G	Net Revenue this year	$                3,053,527.98	$               3,593,991.60	$                    3,352,480.42
I (=B)	Cost to date	$                2,510,000.00	$               6,365,000.00	$                    9,575,000.00
J	Cost to date of previous year	$                                     -	$               2,510,000.00	$                    6,365,000.00
K = I - J	Net Cost for the year	$                2,510,000.00	$               3,855,000.00	$                    3,210,000.00
L = A - D	Estimated Gross Profit (Loss)	$                1,780,000.00	$                   425,000.00	$                        425,000.00
M	Gross Profit (Loss) to be recognised	$                   543,527.98	$                 (118,527.98)	$                                         -