Question

In 2021, 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 2023. Information related to the contract is as follows: 

Westgate recognizes revenue over time according to percentage of completion. 

 

Required: 

1. Calculate the amount of revenue and gross profit to be recognized in each of the three years. 

2. Prepare all necessary journal entries for each of the years (credit “Cash, Materials, etc.” for construction costs incurred). 

3. Prepare a partial balance sheet for 2021 and 2022 showing any items related to the contract. Indicate whether any of the amounts shown are contract assets or contract liabilities. 

4. Calculate the amount of revenue and gross profit to be recognized in each of the three years assuming the following costs incurred and costs to complete information: 

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

Answer 1

• 1.Compute the amount of revenue as follows:

Revenue = Cost incurred * Contract price / Total cost

 

2021: 

Revenue = $2,400,000 * $10,000,000 / ($2,400,000 + $5,600,000)

= $ 3,000,000

2022:

Revenue = $3,600,000 * ($10,000,000 - $3,000,000) / ($3,600,000 + $2,000,000)

= $ 4,500,000

2023:

Revenue = $10,000,000 - $3,000,000 - $4,500,000

= $2,500,000

 

Gross profit = revenue - expenses

 

2021:

G.P = $3,000,000 - $2,400,000

= $600,000

2022:

G.P = $4,500,000 - $3,600,000

= $900,000

2023:

G.P = $2,500,000 - $2,200,000

= $300,000

•  
• 2. Journal entries.
•  

2021:

Construction in process       Dr. $2,400,000

Various accounts                               Cr. $2,400,000

(To record the construction cost)

 

Accounts receivable              Dr. $2,000,000

Bills on construction                         Cr. $2,000,000

(To record the billings in process)

 

Cash                                         Dr. $1,800,000

Accounts receivable                          Cr. $1,800,000

(To record the cash collected)

 

Construction in process        Dr. $600,000

Cost of construction              Dr. $2,400,000

Revenue from contract                   Cr. $3,000,000

(To record the revenue)

 

2022:

Construction in process        Dr. $3,600,000

Various accounts                              Cr. $3,600,000

(To record the construction cost)

 

Accounts receivable               Dr. $4,000,000

Bills on construction                        Cr. $4,000,000

(To record the billings in process)

 

Cash                                          Dr. $3,600,000

Accounts receivable                         Cr. $3,600,000

(To record the cash collected)

 

Construction in process        Dr. $900,000

Cost of construction              Dr. $3,600,000

Revenue from contract                    Cr. $4,500,000

(To record the revenue)

 

2023:

Construction in process        Dr. $2,200,000

Various accounts                              Cr. $2,200,000

(To record the construction cost)

 

Accounts receivable              Dr. $4,000,000

Bills on construction                        Cr. $4,000,000

(To record the billings in process)

 

Cash                                         Dr. $4,600,000

Accounts receivable                         Cr. $4,600,000

(To record the cash collected)

 

Construction in process        Dr. $300,000

Cost of construction              Dr. $2,200,000

Revenue from contract                   Cr. $2,500,000

(To record the revenue)

 

 

• 3. Partial Balance sheet

Particulars	2021	2022
Current assets
Account receivables	2,000,000	4,000,000
Construction in process	3,000,000	7,500,000 = 4,500,000 + 3,000,000
Less Bills	2,000,000	4,000,000
Costs in excess of bills	1,000,000	3,500,000

•  
•  
•  
• 4.Compute the amount of revenue as follows:
•  

Revenue = Cost incurred * Contract price / Total cost

 2021: 

Revenue = $2,400,000 * $10,000,000 / ($2,400,000 + $5,600,000)

= $3,000,000

2022:

Revenue = $3,800,000 * ($10,000,000 - $3,000,000) / ($3,800,000 + $3,100,000)

= $ 3,855,072

2023:

Revenue = $10,000,000 - $3,000,000 - $3,855,072

= $3,144,928

 

Gross profit = revenue - expenses

2021:

G. Profit = $3,000,000- $2,400,000

= $600,000

2022:

G. Profit = $3,855,072- $3,800,000

= $55,072

2023:

G. Loss = $3,144,928- $3,200,000

= ($55,072)

 

• 5.Compute the amount of revenue as follows:
•  

Revenue = Cost incurred * Contract price / Total cost

2021: 

Revenue = $2,400,000 * $10,000,000 / ($2,400,000 + $5,600,000)

= $3,000,000

2022:

Revenue = $3,800,000 * ($10,000,000 - $3,000,000) / ($3,800,000 + $4,100,000)

= $3,367,089

2023:

Revenue = $10,000,000 - $3,000,000- $3,367,089

= $3,632,911

 

Now, compute gross profit as follows:

Gross profit = revenue - expenses

 2021:

G.P = $3,000,000- $2,400,000

= $600,000

2022:

G. Loss = $3,367,089- $3,800,000

= ($432,911)

2023:

G. Loss = $3,632,911- $3,900,000

= ($267,089)

G. Loss = $3,632,911- $3,900,000

= ($267,089)