Question

Stoney Run Construction Company (U.S. GAAP) enters into a 3-year contract to build a new warehouse facility. Information for Years 1, 2, and 3 is shown below:

		Year 1	Year 2	Year 3
Sale price		$2,800,000	$2,800,000	$2,800,000
Estimated costs		1,600,000	2,000,000	2,000,000
Costs incurred to date (paid in cash)		400,000	900,000	2,000,000
Billed to date		250,000	1,150,000	2,800,000
Received in cash to date		190,000	950,000	2,800,000

Question 4:

Calculate the gross profit booked in Year 2:

Question 5:

Book the following journal entries for Year 2:

1-Record costs incurred

2-Record billings on contract

3-Record payments received

4-Record revenue/cost during construction period

Answer 1

(4) Gross Profit booked in year 2 :-

Gross Profit upto date in 2^nd year – Gross Profit booked in year 1

Gross Profit Booked in year 1 :-

% complete in year 1 = Cost incurred upto date / Total Estimated cost

          = 400000/1600000 = 25%

Gross Profit = (Sale Price * % complete) – cost incurred upto date

      = (2800000 * 25%) – 400000 = $300000

Gross Profit upto date in 2^nd year:-

%age of completion in year 2 = Cost incurred upto date / Total Estimated cost

                = 900000/2000000 = 45%

Gross Profit = (Sale Price * % complete) – cost incurred upto date

        = (2800000 * 45%) – 900000 = $360000

Gross Profit booked in year 2 = 3600000 – 300000 = $60000

(5) Journal Entries in year 2 :-

(i) Record costs incurred :-

Construction in Process – Dr   500000

Account Payable    - Cr    500000

(900000 – 400000 = 500000)

(ii) Record billings on contract:-

Account Receivable – Dr   900000

Billings     - Cr       900000

(1150000 – 250000 = 900000)

(iii) Record payments received :-

Cash   - Dr   760000

Account Receivable - Cr 760000

(950000 – 190000 = 760000)

(iv) Record revenue/cost during construction period:-

   Construction in Process – Dr 60000

   Construction Exp - Dr   500000

   Construction Revenue - Cr    560000

[(2800000 * 45%) – (2800000 * 25%) = 560000]