In: Accounting
Question 2
Part A
Luxury Living Concepts Corp. (LLC) is a publicly accountable enterprise that builds large complexes, including schools, office towers, apartment buildings and shopping centres, on a contract basis. Additional information with respect to the company is as follows:
- LLC’s year end is December 31.
- The company uses the cost-to-cost approach to determine the stage of completion of its construction projects.
- The enterprise rounds the percentage of completion to two decimal places (for example, 13.54%).
- A discount rate of 4% adequately reflects the underlying credit risk of LLC’s customer for this transaction.
In 20X1, LLC entered into a $120 million contract to construct a shopping mall over a three-year period. Construction of the project was completed in late 20X3. Total costs were originally estimated to be $98 million. LLC’s progress on the contract and other pertinent information is detailed below:
(in 000's) | 20x1 | 20x2* | 20x3** | Total |
Costs Incurred during year | $23,000 | $55,000 | $43,000 | $121,000 |
Cumulative costs incurred to date | $23,000 | $78,000 | $121,000 | |
Estimated costs to complete | $22,000 | $46,000 | 0 | |
Progress Billings during the year | $29,000 | $51,000 | $40,000 | $120,000 |
Collections during the year | $22,000 | $50,000 | $48,000 | $120,000 |
* The revised cost data was not known in 20X1.
** The revised cost data was not known in 20X2.
Required:
a) Prepare the required journal entries to record transactions relating to the contracts for the 20X1, 20X2 and 20X3 fiscal periods. Show all supporting calculations for each journal entry. The calculations are to be referenced or included in the description of the journal entry.
b) Prepare the excerpts of LLC’s statements of financial position as atDecember 31, 20X1, and December 31, 20X2 (exclude the impact on cash and retained earnings).
Part B
Refer to the facts in Part A. Independent of the requirements in Part A, assume that the additional cost in 20X2 resulted from changes to the project requested by the customer in 20X2 and that the customer agreed to increase the contract price to $140 million. The additional $20 million was added by LLC to its final progress billing in 20X3 and was paid by the customer during that year.
Required:
a) Determine the revenue to be recognized by LLC in each of 20X1, 20X2 and 20X3.
b) Determine the expense to be recognized by LLC in each of 20X1, 20X2and 20X3.
Show all supporting calculations for requirements a) and b) to be eligible to receive partial marks.
Part A
a. Journal entries
1.For 20X1
a. For expenses incurred:
Construction in progress A/c Dr. 23,000
To Accounts Payable A/c 23,000
b. For net income recognized:
Construction in Progress A/c Dr. 38,333 (Note 1)
Expenses A/c Dr. 23,000
To Revenue A/c 61,333
2. For 20X2
a. For expenses incurred:
Construction in Progress A/c Dr. 55,000
To Accounts payable A/c 55,000
b. For net income recognized:
Expenses A/c Dr. 55,000
To Revenue A/c 14,151 (Note 2)
To Construction in Progress A/c 40,849
3.For 20X3
a. For expenses incurred:
Consruction in progress A/c Dr. 43,000
To Accounts Payable A/c 43,000
b. For net income recognized:
Construction in progress A/c Dr. 1,516
Expenses A/c Dr. 43,000
To Revenue A/c 44,516 (Note 3)
Notes for Journal entries
1. Expenses incurred in 20X1= 23,000 Estimated expenses to complete= 22,000. Therefore percentage of completion is as below:
Incurred expenses/Total estimated expenses= 23,000/45,000 = 51.11%
Therefore, total revenue to be recognized = 120,000*51.11% = 61,333
Expenses incurred is 23,000 therefore net debit to construction in progress A/c would be 38,333
2. Cumulative expenses incurred up to date= 78,000 Estimated expenses = 46,000 Percentage of completion = 78,000/124,000= 62.90%
Therefore total revenue to be recognized = 120,000*62.90% = 75,484
As 61,333 of revenue is already recognized, net revenue to be recognized is 14,151(75,484- 61,333)
3. Revenue of 44,516 is nothing but 120,000-61,333-14,151 = 44,516
Excerpts of financial position as on 31/12/20X1 and 31/12/20X2
Particulars | 20X1 | 20X2 |
Assets | ||
Construction in progress | 61,333 | 75,484 |
Liabilities | ||
Accounts payable | 23,000 | 78,000 |
Part B
a)
Particulars | 20X1 | 20X2 | 20X3 |
Percentage of completion | 23,000/45,000 = 51.11% | 78,000/124,000= 62.90% | 100% |
Revenue to be recognized | 71,556(Note i) | 16,509(Note ii) | 51,935(Note iii) |
b)
Particulars | 20X1 | 20X2 | 20X3 |
Expenses to be recognized(same as incurred) | 23,000 | 55,000 | 43,000 |
Notes
i) Percentage of completion = 51.11% Revenue to be recognized = 140,000*51.11% = 71,556
ii) Percentage of completion = 62.90% Revenue to be recognized =140,000*62.90% - 71,556 = 16,509
iii) Balance revenue = 140,000 - 71,556 - 16,509 = 51,935