Question

Q 6.      The board of directors of Essex Multi-Construction Corp. 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 Essex’s controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information:

1.    Essex commenced doing business on January 1, 2019.

2.    Construction activities for the year ended December 31, 2019, were as follows:

Project	Total Contract Price	Contract cost incurred through 31-12-2019	Estimated additional cost to complete contract
A	$615,000	$510,000	$120,000
B	$450,000	$130,000	$260,000
C	$475,000	$350,000	0
D	$600,000	$370,000	$290,000
E	$480,000	$320,000	$80,000
Total:	$2,620,000	$1,680,000	$750,000

3.    Each contract is with a different customer.

4.    Any work remaining to be done on the contracts is expected to be completed in 2020.

Instructions

a)    Prepare a schedule by project, calculating the amount of gross profit (or loss) for the 2019 calendar year, which would be reported under the percentage-of-completion method for each of the project. Show all relevant calculations.                                                                                                           Marks: 7

b)    Prepare the general journal entry to record revenue and gross profit on project B for 2019, assuming that the percentage-of-completion method is used.                                                               Marks: 2

Answer 1

a
	A	B	C	D	E
Contract price	615000	450000	475000	600000	480000
Contract costs incurred	510000	130000	350000	370000	320000
Additional costs to complete	120000	260000	0	290000	80000
Total Cost	630000	390000	350000	660000	400000
Total Gross profit or (Loss)	-15000	60000	125000	-60000	80000
The amount reported as income (loss) under the percentage-of-completion method for 2019 is:
Project
A	-15000
B	20000	(60000*130000/390000)
C	125000
D	-60000
E	64000	80000*320000/400000
b
General Journal	Debit	Credit
Construction in process	20000
Construction expenses	130000
Revenue from Long-term Contracts		150000