Question

During 2015 Cambridge Co. started a construction job with a contract price of $2,000,000.
The job was completed in 2017. The following information is available:
	2015		2016		2017
Costs incurred to date	500,000		900,000		1,100,000
Estimated costs to complete	600,000		200,000		0
Billings to date	500,000		1,400,000		2,000,000
Collections to date	450,000		1,300,000		1,800,000
Instructions:
(a) Compute the amount of gross profit to be recognized each year assuming the percentage of
completion method is used.
(b) ****EXTRA CREDIT - Prepare all necessary journal entries for 2016.
	2015		2016		2017
	2,000,000		2,000,000		2,000,000

Answer 1

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Calculation of Gross Profit							Journal Entries
Particulars	2015	2016	2017					Journal Entries	2015	2016	2017
Contract Price	2,000,000	2,000,000	2,000,000	A			Costs Incurred	CIP (Work-in-progress) Dr.	500,000	400,000	200,000
Cost Incurred to date	500,000	900,000	1,100,000	B				Cash Cr.	500,000	400,000	200,000
Estimated cost to complete	600,000	200,000	-	C
Estimated total cost	1,100,000	1,100,000	1,100,000	D=B+C			Billing	Accounts Receivable Dr.	500,000	900,000	1,100,000
Percentage complete	45.45%	81.82%	100.00%	E=B/D				Billing on CIP Cr.	500,000	900,000	1,100,000
(Cost Incurred to date/Estimated total cost)
Cost Incurred during the year	500,000.00	400,000.00	200,000.00	F			Receiving Payments	Cash Dr.	450,000	850,000	500,000
Cost Incurred to date of current year less Cost Incurred to date of previous year								Accounts Receivable Cr.	450,000	850,000	500,000
Revenue to be recognized	909,091	727,273	363,636	G=A*E
(Contract Price*Percentage complete)- revenue previously recognized							Period end adjustments for Revenue	Construction Expense Dr.	500,000	400,000	200,000
Year 2015: 45.45% completed. Revenue recognized = 45.45% x $2,000,000 = $909,091.								CIP (Work-in-progress) Dr.	409,091	327,273	163,636
Year 2016: 81.82% completed. Revenue recognized = 81.82% x $2,000,000 – $909,091 (previously recognized) = $727,273.								Construction Revenue Cr.	909,091	727,273	363,636
Year 2017: 100% completed. Revenue recognized = 100% x $2,000,000 – $909,091– $727,273 (previously recognized) = $363,636.
Gross Profit/(Loss)	409,090.91	327,272.73	163,636.36	H=G-F			Completion of Project	Billing on CIP Dr.			2,000,000
Billings to Date	500,000.00	1,400,000.00	2,000,000.00					CIP (Work-in-progress) Cr.			2,000,000
Billings during the year	500,000.00	900,000.00	1,100,000.00
Billings to Date of current year less Billings to Date of previous year
Collections to Date	450,000.00	1,300,000.00	1,800,000.00
Collection during the year	450,000.00	850,000.00	500,000.00
Collections to Date of current year less Collections to Date of previous year