Question

The board of directors of Ogle 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 Ogle's controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information:

1. Ogle commenced doing business on January 1, 2018.

2. Construction activities for the year ended December 31, 2018, were as follows:

Project	Total contact Price	Billings Through 12/31/18	Cash Collections through 12/31/18
A	$500,000	$340,000	$310,000
B	$720,000	$210,000	$210,000

Project	Contract Costs Incurred Through 12/31/18	Estimated additional costs to complete contracts
A	$424,000	$101,000
B	$195,000	$455,000

3. Each contract is with a different customer

4. Any work remaining to be done on the contracts is expected to be completed in 2019

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, 2018, which would be reported under:

  (1) The completed-contract method

(2) The percentage-of-completion method (based on estimated costs)

(B) prepare the journal entry(ies) to record revenue and gross profit on project B (second project) for 2018, assuming that the percentage-of-completion method is used.

(c) indicate the balances that would appear in the balance sheet at December 31, 2018 for the following accounts for project A, 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 B, if the completed-contract method is used?

Answer 1

Working:
		Amounts in Dollars
		Project A	Project B
	Cost Incurred	424000	195000
	Addition estimited Cost	101000	455000
	Total Cost (Cost Incurred + Additional Estimated Cost)	525000	650000
	Percentage Completion (Cost Incurred/Total Cost Calculated)	80.76	30
	Contract Price	500000	720000
	Revenue Recognizable (Contract Price * Percentage Completion)	403810	216000
	Billing	340000	310000
	Cash Collected	310000	210000
	Receivables Balance as on Dec 31, 2018 (Billing and Cash Collected)	30000	100000
a.	Statement of Gain(Loss) for the year ending December 31, 2018
		Amount in Dollars
		Completed Contract Method	Percentage of Completion Method:
		Project A	Project B	Total	Project A	Project B	Total
	Revenue	0	0	0	4,03,810	2,16,000	6,19,810
	Less: Expense	0	0	0	4,24,000	1,95,000	6,19,000
	Gain/Loss on Construction Project	0	0	0	-20,190	21,000	810
1	As shown above, under Completed contract method, revenue and expense will be recognised only when project is complete and as the project will be completed in coming year 2019, the construction expense and revenue will be recognised in 2019. Till then, all expenses incurred will be debited in Construction in Process Account and Billing amount will be credited in Billing for construction in Process Account
2	As shown in above table
b.	Journal Entries for Project B, assuming Percentage of Completion Method:
	Account	Debit	Credit	Narration
	Constuction in Process Account	195000		Expense Incurred
	Bank		195000
	Receivables	310000		Billing
	Billing for Construction in Process		310000
	Bank	210000		Cash Received
	Receivables		210000
	Construction Expense	195000		Gain/Loss on Construction
	Construction Revenue		2,16,000
	Construction in Process	21,000
c.	Balances in Balance Sheet for the Project A at December 31,2018, assuming Percentage of Completion Method:
		Debit	Credit	Comments
	Accounts Receivables	30000		Computed in Working above
	Billing for Construction in Process		340000	Billed Amount
	Construction in Process	403810		Expense Incurred less Loss on Construction Project
d.	Balances in Balance Sheet for the Project B at December 31,2018, assuming Completed Contract Method:
		Debit	Credit	Comments
	Accounts Receivables	100000		Computed in Working above
	Billing for Construction in Process		310000	Billed Amount
	Construction in Process	195000		Expense Incurred