1.
1. Reese Construction Corporation cReese Construction Corporation contracted to construct a building for $1,500,000.ontracted to construct a building for $1,500,000. Construction began in 2007 and was completed in 2008. Data relating to the contract are Construction began in 2007 and was completed in 2008. Data relating to the contract are summarized below: summarized below: Year ended Year ended December 31, December 31, 2007 2008 2007 2008 Costs
Costs incurred incurred $600,000 $600,000 $450,000$450,000 Estimated
Estimated costs costs to to complete complete 400,000400,000 ——
Reese uses the percentage-of-completion method as the basis for income recognition. Reese uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2007, and 2008, respectively, Reese should report For the years ended December 31, 2007, and 2008, respectively, Reese should report gross profit of gross profit of a. a. $270,000 $270,000 and and $180,000.$180,000. b. b. $900,000 $900,000 and and $600,000.$600,000. c. c. $300,000 $300,000 and and $150,000.$150,000. d. d. $0 $0 and and $450,000.$450,000. C C
2. Winsor Construction Company uses the percentage-of-completion method of accounting. In 2. Winsor Construction Company uses the percentage-of-completion method of accounting. In 2007, Winsor began work on a contract it had received which provided for a contract price of 2007, Winsor began work on a contract it had received which provided for a contract price of $15,000,000.
$15,000,000. Other Other details details follow:follow:
2007 2007 Costs
Costs incurred incurred during during the the year year $7,200,000$7,200,000 Estimated
Estimated costs costs to to complete complete as as of of December December 31 31 4,800,0004,800,000 Billings
Billings during during the the year year 6,600,0006,600,000 Collections
Collections during during the the year year 3,900,0003,900,000 What should be the gross profit recognized in 2007?
What should be the gross profit recognized in 2007? a. $600,000 a. $600,000 b. $7,800,000 b. $7,800,000 c. $1,800,000 c. $1,800,000 d. $3,000,000 d. $3,000,000 cc
In 2007, Crane Corporation began construction work under a three-year contract. The contract In 2007, Crane Corporation began construction work under a three-year contract. The contract price is $2,400,000. Crane uses the percentage-of-completion method for financial accounting price is $2,400,000. Crane uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentations to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31,
relating to this contract at December 31, 2007, follow:2007, follow: Balance Sheet
Balance Sheet Accounts receivable
Accounts receivable——construction construction contract contract billings billings $100,000$100,000 Construction
Construction in in progress progress $300,000$300,000 Less
Less contract contract billings billings 240,000240,000 Costs
Costs and and recognized recognized profit profit in in excess excess of of billings billings 60,00060,000 Income Statement
Income Statement Income
3. How much cash was collected in 2007 on this contract? a. $100,000 b. $140,000 c. $20,000 d. $240,000 b
4. What was the initial estimated total income before tax on this contract? a. $300,000
b. $320,000 c. $400,000 d. $480,000 d
5. Eaton Construction Co. uses the percentage-of-completion method. In 2007, Eaton began work on a contract for $3,300,000 and it was completed in 2008. Data on the costs are:
Year Ended December 31
2007 2008
Costs incurred $1,170,000 $840,000
Estimated costs to complete 780,000 —
For the years 2007 and 2008, Eaton should recognize gross profit of
2007 2008 a. $0 $1,290,000 b. $774,000 $516,000 c. $810,000 $480,000 d. $810,000 $1,290,000 c
Use the following information for questions 66 and 67.
Ramos, Inc. began work in 2007 on contract #3814, which provided for a contract price of $7,200,000. Other details follow:
2007 2008
Costs incurred during the year $1,200,000 $3,675,000 Estimated costs to complete, as of December 31 3,600,000 0
Billings during the year 1,350,000 5,400,000
Collections during the year 900,000 5,850,000
6. Assume that Ramos uses the percentage-of-completion method of accounting. The portion of the total gross profit to be recognized as income in 2007 is
a. $450,000. b. $600,000. c. $1,800,000. d. $2,400,000. B
7. Assume that Ramos uses the completed-contract method of accounting. The portion of the total gross profit to be recognized as income in 2008 is
a. $900,000. b. $1,350,000. c. $2,325,000. d. $7,200,000. c
Use the following information for questions 68 and 69.
Miley, Inc. began work in 2007 on a contract for $8,400,000. Other data are as follows:
2007 2008
Costs incurred to date $3,600,000 $5,600,000
Estimated costs to complete 2,400,000 —
Billings to date 2,800,000 8,400,000
Collections to date 2,000,000 7,200,000
8. If Miley uses the percentage-of-completion method, the gross profit to be recognized in 2007 is a. $1,440,000. b. $1,600,000. c. $2,160,000. d. $2,400,000. A
9. If Miley uses the completed-contract method, the gross profit to be recognized in 2008 is a. $1,360,000.
b. $2,800,000. c. $1,400,000. d. $5,600,000. B
10. Parker Construction Co. uses the percentage-of-completion method. In 2007, Parker began work on a contract for $5,500,000; it was completed in 2008. The following cost data pertain to this contract:
Year Ended December 31
2007 2008
Cost incurred during the year $1,950,000 $1,400,000 Estimated costs to complete at the end of year 1,300,000 —
The amount of gross profit to be recognized on the income statement for the year ended December 31, 2008 is a. $800,000. b. $860,000. c. $900,000. d. $2,150,000. A
11. If the completed-contract method of accounting was used, the amount of gross profit to be recognized for years 2007 and 2008 would be
2007 2008 a. $2,250,000. $0. b. $2,150,000. $(100,000). c. $0. $2,150,000. d. $0. $2,250,000. C
12. Willingham Construction Company uses the percentage-of-completion method. During 2007, the company entered into a fixed-price contract to construct a building for Richman Company for $30,000,000. The following details pertain to the contract:
At December 31, 2007 At December 31, 2008
Percentage of completion 25% 60%
Estimated total cost of contract $22,500,000 $25,000,000 Gross profit recognized to date 1,875,000 3,000,000 The amount of construction costs incurred during 2008 was
a. $15,000,000. b. $9,375,000. c. $5,625,000. d. $2,500,000. B
Use the following information for questions 73 and 74.
Carter Construction Company had a contract starting April 2008, to construct a $15,000,000 building that is expected to be completed in September 2009, at an estimated cost of $13,750,000. At the end of 2008, the costs to date were $6,325,000 and the estimated total costs to complete had not changed. The progress billings during 2008 were $3,000,000 and the cash collected during 2008 was $2,000,000. Carter uses the percentage-of-completion method.
13. For the year ended December 31, 2008, Carter would recognize gross profit on the building of a. $0. b. $527,083. c. $575,000. d. $675,000. c
14. At December 31, 2008, Carter would report Construction in Process in the amount of a. $6,900,000. b. $6,325,000. c. $5,900,000. d. $575,000. A
15. Kirby Builders, Inc. is using the completed-contract method for a $5,600,000 contract that will take two years to complete. Data at December 31, 2007, the end of the first year, are as follows:
Costs incurred to date $2,560,000
Estimated costs to complete 3,280,000
Billings to date 2,400,000
Collections to date 2,000,000
The gross profit or loss that should be recognized for 2007 is a. $0.
b. a $240,000 loss. c. a $120,000 loss. d. a $105,600 loss. B
Use the following information for questions 76 through 78.
Melton Construction Co. began operations in 2007. Construction activity for 2007 is shown below. Melton uses the completed-contract method.
Billings Collections Estimated
Contract Through Through Costs to Costs to
Contract Price 12/31/07 12/31/07 12/31/07 Complete
1 $3,200,000 $3,150,000 $2,600,000 $2,150,000 —
2 3,600,000 1,500,000 1,000,000 820,000 $1,880,000
3 3,300,000 1,900,000 1,800,000 2,250,000 1,200,000
16. Which of the following should be shown on the income statement for 2007 related to Contract 1? a. Gross profit, $450,000 b. Gross profit, $1,000,000 c. Gross profit, $1,050,000 d. Gross profit, $600,000 c
17. Which of the following should be shown on the balance sheet at December 31, 2007 related to Contract 2? a. Inventory, $680,000 b. Inventory, $820,000 c. Current liability, $680,000 d. Current liability, $1,500,000 c
18. Which of the following should be shown on the balance sheet at December 31, 2007 related to Contract 3? a. Inventory, $200,000 b. Inventory, $350,000 c. Inventory, $2,100,000 d. Inventory, $2,250,000 a
19 Flynn Construction Co. has consistently used the percentage-of-completion method of recognizing revenue. During 2007, Flynn entered into a fixed-price contract to construct an office building for $12,000,000. Information relating to the contract is as follows:
At December 31
2007 2008
Percentage of completion 15% 45%
Estimated total cost at completion $9,000,000 $9,600,000 Gross profit recognized (cumulative) 600,000 1,440,000 Contract costs incurred during 2008 were
a. $2,880,000. b. $2,970,000. c. $3,150,000. d. $4,320,000.
b
20. Noland Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2007, Noland started work on a $35,000,000 construction contract that was completed in 2008. The following information was taken from Noland's 2007 accounting records:
Progress billings $11,000,000
Costs incurred 10,500,000
Collections 7,000,000
Estimated costs to complete 21,000,000
What amount of gross profit should Noland have recognized in 2007 on this contract? a. $3,500,000 b. $2,333,334 c. $1,750,000 d. $1,166,667 d computational: 1. c $600,000 —————————— × ($1,500,000 – $1,000,000) = $300,000 $600,000 + $400,000 ($1,500,000 – $1,050,000) – $300,000 = $150,000. 2. c $7,200,000 ——————————— × ($15,000,000 – $12,000,000) = $1,800,000. $7,200,000 + $4,800,000 3. b $240,000 – $100,000 = $140,000.
4. d $300,000 – $60,000 = $240,000 $240,000
————————— × ($2,400,000 – Total estimated cost) = $60,000 Total estimated cost
Total estimated cost = $1,920,000 $2,400,000 – $1,920,000 = $480,000. 5. c $1,170,000 —————- × ($3,300,000 – $1,950,000) = $810,000 $1,950,000 ($3,300,000 – $2,010,000) – $810,000 = $480,000. 6. b $1,200,000 ————— × ($7,200,000 – $4,800,000) = $600,000. $4,800,000 7. c $7,200,000 – $4,875,000 = $2,325,000. 8. a $3,600,000 ————— × ($8,400,000 – $6,000,000) = $1,440,000. $6,000,000 9. b $8,400,000 – $5,600,000 = $2,800,000. 10. a [$1,950,000 ÷ ($1,950,000 + $1,300,000)] × $2,250,000 = $1,350,000 ($5,500,000 – $3,350,000) – $1,350,00 = $800,000. 11. c $5,500,000 – $3,350,000 = $2,150,000. 12. b ($25,000,000 × .60) – ($22,500,000 × .25) = $9,375,000. 13. c ($6,325,000 ÷ $13,750,000) × $1,250,000 = $575,000. 14. a ($6,325,000 ÷ $13,750,000) × $1,250,000 = $575,000. $6,325,000 + $575,000 = $6,900.000. 15. b $5,600,000 – ($2,560,000 + $3,280,000) = –$240,000. 16. c $3,200,000 – $2,150,000 = $1,050,000. 17. c $1,500,000 – $820,000 = $680,000. 18. a ($2,250,000 – $150,000) – $1,900,000 = $200,000. 19. b ($9,600,000 × 45%) – ($9,000,000 × 15%) = $2,970,000. $10,500,000 20. d —————— × ($35,000,000 – $31,500,000) = $1,166,667. $31,500,000
Ex. 18-110—Percentage-of-completion method.
Garnet Construction Co. contracted to build a bridge for $5,000,000. Construction began in 2007 and was completed in 2008. Data relating to the construction are:
2007 2008
Costs incurred $1,650,000 $1,375,000
Estimated costs to complete 1,350,000 —
Garnet uses the percentage-of-completion method.
Instructions
(a) How much revenue should be reported for 2007? Show your computation. (b) Make the entry to record progress billings of $1,650,000 during 2007. (c) Make the entry to record the revenue and gross profit for 2007.
(d) How much gross profit should be reported for 2008? Show your computation.
Solution 18-110 (a) $1,650,000
————— × $5,000,000 = $2,750,000 $3,000,000
(b) Accounts Receivable ... 1,650,000
Billings on Construction in Process ... 1,650,000 Solution 18-110 (cont.)
(c) Construction Expenses... 1,650,000 Construction in Process ... 1,100,000
Revenue from Long-Term Contracts ... 2,750,000
(d) Revenue $5,000,000
Costs 3,025,000
Total gross profit 1,975,000
Recognized in 2007 (1,100,000) Recognized in 2008 $ 875,000 Or Total revenue $5,000,000 Recognized in 2007 (2,750,000) Recognized in 2008 2,250,000 Costs in 2008 (1,375,000) Gross profit in 2008 $ 875,000
Ex. 18-111—Percentage-of-completion method.
Stiner Builders contracted to build a high-rise for $14,000,000. Construction began in 2007 and is expected to be completed in 2010. Data for 2007 and 2008 are:
2007 2008
Costs incurred to date $1,800,000 $5,200,000
Stiner uses the percentage-of-completion method. Instructions
(a) How much gross profit should be reported for 2007? Show your computation. (b) How much gross profit should be reported for 2008?
(c) Make the journal entry to record the revenue and gross profit for 2008.
Solution 18-111 (a) $1,800,000 ————— × $5,000,000 = $1,000,000 $9,000,000 (b) $5,200,000 —————— × $4,000,000 = $2,080,000 $10,000,000
Less 2007 gross profit 1,000,000 Gross profit in 2008 $1,080,000
(c) Construction in Process ... 1,080,000 Construction Expenses... 3,400,000
Revenue from Long-Term Contracts ... 4,480,000
Ex. 18-112—Percentage-of-completion and completed-contract methods.
On February 1, 2007, Nance Contractors agreed to construct a building at a contract price of $6,000,000. Nance estimated total construction costs would be $4,000,000 and the project would be finished in 2009. Information relating to the costs and billings for this contract is as follows:
2007 2008 2009
Total costs incurred to date $1,500,000 $2,640,000 $4,600,000
Estimated costs to complete 2,500,000 1,760,000
-0-Customer billings to date 2,200,000 4,000,000 5,600,000
Collections to date 2,000,000 3,500,000 5,500,000
Instructions
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and for completed-contract accounting, show the gross profit that should be recorded for 2007, 2008, and 2009.
Percentage-of-Completion Completed-Contract
Gross Profit Gross Profit
2007 __________ 2007 __________
2008 __________ 2008 __________
Solution 18-112
Percentage-of-Completion Completed-Contract
Gross Profit Gross Profit
2007 $750,000a 2007 — 2008 $210,000b 2008 — 2009 $440,000c 2009 $1,400,000d a $1,500,000 ————— × $2,000,000 = $750,000 $4,000,000 b $2,640,000 ————— × $1,600,000 = $960,000 $4,400,000
Less 2007 gross profit (750,000) 2008 gross profit $210,000 c
Total revenue $6,000,000
Total costs 4,600,000
Total gross profit 1,400,000 Recognized to date (960,000) 2009 gross profit $ 440,000 d
Total revenue $6,000,000
Total costs 4,600,000
Total gross profit $1,400,000
Pr. 18-117—Long-term construction project accounting.
Benson Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost to cost basis. Benson began work on a lump-sum contract at the beginning of 2008. As bid, the statistics were as follows:
Lump-sum price (contract price) $4,000,000
Estimated costs
Labor $ 850,000
Materials and subcontractor 1,750,000
Indirect costs 400,000 3,000,000
Pr. 18-117 (cont.)
At the end of the first year, the following was the status of the contract:
Billings to date $2,230,000
Costs incurred to date
Labor $ 464,000
Materials and subcontractor 1,098,000
Indirect costs 193,000 1,755,000
Latest forecast total cost 3,000,000
It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered in the costs incurred to date.
Instructions
(a) Compute the percentage of completion on the contract at the end of 2008.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2008.
(c) Make the journal entry to record the income (loss) for 2008 on Benson's books.
(d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of Benson Construction at the end of 2008 related to its construction accounts. Also indicate where these items would be classified on the balance sheet. Billings collected during the year amounted to $1,980,000.
(e) Assume the latest forecast on total costs at the end of 2008 was $4,050,000. How much income (loss) would Benson report for the year 2008?
Solution 18-117
(a) Costs to date $1,755,000
Less materials on job site (105,000) $1,650,000 Costs Incurred to Date
—————————— = Percentage of Completion Total Estimated Costs
$1,650,000 ————— = 55% $3,000,000 (b) 55% × $4,000,000 = $2,200,000 Costs incurred 1,650,000 Gross profit $ 550,000 (c) Construction Expense ... 1,650,000 Construction in Process ... 550,000
Revenue from Long-Term Project ... 2,200,000 (d) Current Assets
Solution 18-117 (cont.) Current Liability
Billings in excess of contract costs and
recognized profit $30,000 ($2,230,000 – $2,200,000) (e) Total loss reported in 2008
Contract price $4,000,000
Estimated cost to complete 4,050,000 Amount of loss to be reported $ (50,000)
Pr. 18-118—Accounting for long-term construction contracts.
The board of directors of Dodd Construction Company is meeting to choose between the completed-contract method and the percentage-of-completion method of accounting for long-term contracts in the company's financial statements. You have been engaged to assist Dodd's controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information:
1. Dodd commenced doing business on January 1, 2008.
2. Construction activities for the year ended December 31, 2008, were as follows: Total Contract Billings Through Cash Collections
Project Price 12/31/08 Through 12/31/08
A $ 515,000 $ 340,000 $ 310,000 B 690,000 210,000 210,000 C 475,000 475,000 390,000 D 200,000 100,000 65,000 E 480,000 400,000 400,000 $2,360,000 $1,525,000 $1,375,000
Contract Costs Estimated Incurred Through Additional Costs to Project 12/31/08 Complete Contracts
A $ 424,000 $101,000 B 195,000 455,000 C 350,000 -0-D 123,000 97,000 E 320,000 80,000 $1,412,000 $733,000
3. Each contract is with a different customer.
4. Any work remaining to be done on the contracts is expected to be completed in 2009.
Instructions
(a) Prepare a schedule by project, computing the amount of income (or loss) before selling, general, and administrative expenses for the year ended December 31, 2008, which would be reported under:
(2) The percentage-of-completion method (based on estimated costs).
Pr. 18-118 (cont.)
(b) Prepare the general journal entry(ies) to record revenue and gross profit on project B (second project) for 2008, assuming that the percentage-of-completion method is used. (c) Indicate the balances that would appear in the balance sheet at December 31, 2008 for the
following accounts for Project D (fourth project), assuming that the percentage-of-completion method is used.
Accounts Receivable
Billings on Construction in Process Construction in Process
(d) How would the balances in the accounts discussed in part (c) change (if at all) for Project D (fourth project), if the completed-contract method is used?
Solution 18-118 (a) (1) and (2)
Projects A B C D E
Contract price $515,000 $690,000 $475,000 $200,000 $480,000 Contract costs incurred 424,000 195,000 350,000 123,000 320,000 Additional costs
to complete 101,000 455,000 -0- 97,000 80,000
Total cost 525,000 650,000 350,000 220,000 400,000
Total gross profit
or (loss) $ (10,000) $ 40,000 $125,000 $ (20,000) $ 80,000 The amount reported as income (loss) under the completed-contract method for 2008 is:
Project A $(10,000) B -0-C 125,000 D (20,000) E -0-$ 95,000
The amount reported as income (loss) under the percentage-of-completion method for 2008 is: Project A $(10,000) B 12,000 $40,000 × ($195,000 ÷ $650,000) C 125,000 D (20,000) E 64,000 $80,000 × ($320,000 ÷ $400,000) $171,000 (b) Construction in Process ... 12,000 Construction Expenses... 195,000
Revenue from Long-term Contracts ... 207,000
Solution 18-118 (cont.)
(c) Billings $100,000
Cash collections 65,000
Accounts receivable $ 35,000
Billings on Construction in Process 100,000
Costs incurred $123,000
Loss reported (20,000)
Construction in process $103,000 (d) The account balances would be the same.
Pr. 18-119—Long-term contract accounting (completed-contract).
Ponce Construction, Inc. experienced the following construction activity in 2008, the first year of operations.
Cash Cost Estimated
Total Billings Collections Incurred Additional
Contract through through through Costs to
Contract Price 12/31/08 12/31/08 12/31/08 Complete
X $260,000 $165,000 $155,000 $182,000 $ 63,000
Y 330,000 115,000 115,000 100,000 247,000
Z 233,000 233,000 198,000 158,000
-0-$823,000 $513,000 $468,000 $440,000 $310,000
Each of the above contracts is with a different customer, and any work remaining at December 31, 2008 is expected to be completed in 2009.
Instructions
Prepare a partial income statement and a partial balance sheet to indicate how the above contract information would be reported. Ponce uses the completed-contract method.
Solution 18-119
Ponce Construction, Inc. Income Statement For the Year 2008
Revenue from long-term contracts (contract Z) $233,000
Cost of construction (contract Z) 158,000
Gross profit $ 75,000
Provision for loss (contract Y)* 17,000
*Contract costs through 12/31/08 $100,000
Estimated costs to complete 247,000
Total contract price 330,000
Solution 18-119 (cont.)
Ponce Construction, Inc. Balance Sheet As of 12/31/08 Current assets:
Accounts receivable ($513,000 – $468,000) $ 45,000
Inventories
Construction in process (contract X) $182,000
Less: Billings 165,000
Unbilled contract costs 17,000
Current liabilities:
Billings ($115,000) in excess of contract costs ($100,000) 15,000
