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	$	2,016,000		$	2,808,000		$	2,613,600
Estimated costs to complete as of year-end		5,184,000			2,376,000			0
Billings during the year		2,180,000			2,644,000			5,176,000
Cash collections during the year		1,890,000			2,500,000			5,610,000

Westgate recognizes revenue over time according to percentage of completion.

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	$	2,016,000		$	3,890,000		$	3,290,000
Estimated costs to complete as of year-end		5,184,000			3,190,000			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	$	2,016,000		$	3,890,000		$	4,170,000
Estimated costs to complete as of year-end		5,184,000			4,280,000			0

Answer 1

Solution :-

1. Answer -

Particulars	2018	2019	2020
Contract price ( C)	$10,000,000	$10,000,000	$10,000,000
Actual cost to date - (A)	$2,016,000	$4,824,000	$7,437,600
Estimated cost to complete - (B)	$5,184,000	$2,376,000
Total estimated costs - (D = A + B)	$7,200,000	$7,200,000	$7,437,600
Estimated gross profit (loss) Actual in 2020 ( E = C - D)	$2,800,000	$2,800,000	$2,562,400

Calculation of Revenue Recognition :-

2018 = ($2,016,000 ÷ $7,200,000) × $10,000,000 = $2,800,000

2019 = ($4,824,000 ÷ $7,200,000) × $10,000,000 = $6,700,000

2020 = ($10,000,000 - $2,800,000 - $6,700,000) = $500,000

Gross profit (loss) Recognition:-

2018 = $2,800,000 - $2,016,000 = $784,000

2019 = $6,700,000 - $2,808,000 = $3,892,000

2020 = Total gross profit recognised on the project - Gross profit recognised in 2019 - Gross profit recognised in 2018

Gross loss = $2,562,400 - $3,892,000 - $784,000 = ($2,113,600)

2 a Answer :- Journal entries

Date	Particulars	Debit	Credit
2018	construction in progress	$2,016,000
	Various accounts		$2,016,000
2018	Accounts Receivable	$2,180,000
	Billings on construction contract		$2,180,000
2018	cash	$1,890,000
	Accounts Receivable		$1,890,000
2018	No Journal Entry

2 b Answer :- Journal Entries

Date	Particulars	Debit	Credit
2019	Construction in progress	$28,08,000
	Various accounts		$2,808,000
2019	Accounts Receivable	$2,644,000
	Billings on construction contract		$2,644,000
2019	Cash	$2,500,000
	Accounts Receivable		$2,500,000
2019	No Journal Entry is required

4 Answer :-

Particulars	2018	2019	2020
Contract price	$10,000,000	$10,000,000	$10,000,000
Actual Costs to date	$2,016,000	$5,906,000	$9,196,000
Estimated costs to complete	$5,184,000	$3,190,000
Total estimated costs	$7,200,000	$9,096,000	$9,196,000
Estimated gross profit ( Actual in 2020)	$2,800,000	$904,000	$804,000

Revenue Recognition :-

2018 =( $2,016,000÷ $7,200,000) × $10,000,000 = $2,800,000

2019 = ($5,906,000 ÷ $9,096,000) × $10,000,000 - $2,800,000 = $3,692,964

2020 = ($10,000,000 - $2,800,000 - $3,692,964) = $3,507,036

Gross profit (loss) Recognition :-

2018 = $2,800,000 - $2,016,000 = $ 784,000

2019 = $ 3,692,964 - $3,890,000 =($197,036)

2020 = Total gross profit recognised on project - Gross profit recognised in 2019 - Gross Profit recognised in 2018

= $804,000 + $197,036 - $784,000 = $217,036

5 Answer :-

PARTICULARS	2018	2019	2020
Contract price	$10,000,000	$10,000,000	$10,000,000
Actual Costs to date	$2,016,000	$5,906,000	$10,076,000
Estimated cost to complete	$5,184,000	$4,280,000
Total estimated costs	$7,200,000	$10,186,000	$10,076,000
Estimated gross profit ( Actual in 2020)	$2,800,000	($186,000)	($76,000)

Revenue Recognition :-

2018 = ($2,016,000 ÷ $72,00,000) × $10,000,000 = $2,800,000

2019 = ($5,906,000 ÷ $10,186,000) × $10,000,000 - $2,800,000 = $2,998,154

2020 = $10,000,000 - $2,800,000 - $2,998,154 = $4,201,846

Gross profit (loss) Recognition :-

2018 = $2,800,000 - $2,016,000 = $784,000

2019 = $784,000 - $3,890,000 = ($3,106,000)

2020 = ($176,000) -$784,000 +$3,106,000 = $2,146,000