Question

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

·        Apache commenced doing business on January 1, 2020.

·        Construction activities for the year ended December 31, 2020, were as follows:

Project	Total contract Price	Billings through 12/31/20	Cash collections through 12/31/20
A	$ 615,000	$ 340,000	$ 310,000
B	450,000	135,000	135,000
C	475,000	475,000	390,000
D	600,000	240,000	160,000
E	480,000	400,000	400,000
	$ 2,620,000	$ 1,590,000	$ 1,395,000

        

Project	Contract costs incurred through 12/31/20	Estimated additional costs to complete contracts
A	$ 510,000	$ 120,000
B	130,000	260,000
C	350,000	-0-
D	370,000	290,000
E	320,000	80,000
	$ 1,680,000	$ 750,000

·        Each contract is with a different customer.

·        Any work remaining to be done on the contracts is expected to be completed in 2021.

Required

1.      Prepare a schedule by project, calculating the amount of gross profit (or loss) for the 2020 calendar year, which would be reported under:                                                  

a.      The completed-contract method.

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

2.      Prepare the general journal entry to record revenue and gross profit on project B for 2020, assuming that the percentage-of-completion method is used.                               

3.      Indicate the balances that would appear in the statement of financial position at December 31, 2020 for the following accounts for Project D, assuming that the percentage-of-completion method is used.                                                                                                      

a.      Accounts Receivable

b.      Billings on Construction in Process

c.      Construction in Process

How would the balances in the accounts discussed in part 3 above change (if at all) for Project D, if the completed-contract method is used?          

Answer 1

1…
Project	Contract costs incurred through 12/31/20	Estimated additional costs to complete contracts	% complete= costs incurred/(Cost incurred+Estd. Addl.costs to complete	Total contract price(revenue)	Revenue recognised under (100%) completed contract method	Gross profit for 2020 reported under CC method=revenue recognised-Costs incurred	Revenue recognised under % of completion method=Total contract price*% complete	Gross profit for 2020reported under % of completion method=revenue recognised-Costs incurred todate
1	2=Given	3=Given	4	5	6=Given	7=6*5	8=7-2	9=6*5	10=9-2
A	510000	120000	510000/(510000+120000)=	80.95%	615000	0	NA	497857.14	-12142.86
B	130000	260000	130000/(130000+260000)=	33.33%	450000	0	NA	150000.00	20000.00
C	350000	0	350000/(350000+0)=	100.00%	475000	475000	125000	475000.00	125000.00
D	370000	290000	370000/(370000+290000)=	56.06%	600000	0	NA	336363.64	-33636.36
E	320000	80000	320000/(320000+80000)=	80.00%	480000	0	NA	384000.00	64000.00
	1680000	750000	1680000/(1680000+750000)=	69.14%	2620000	475000	125000	1843220.78	163220.78

2. Project B	Debit	Credit
Construction expense	130000
Construction-in-process	20000
Construction revenue		150000
(net for gross profit--as revenue recognised is more than costs recognised)
3. For project D
Journal entries under % of completion method will be:
Construction in Process	370000
Cash		370000
(to record incurring costs)
Accounts receivable	240000
Billings on Construction in Process		240000
(to record billing)
Cash	160000
Accounts receivable		160000
(to record reciving payments)
Construction expense	370000
Construction-in-process		33636.36
Construction revenue		336363.6
(to recognise revenues, costs, & gross loss)
So, from the above, balances as at Dec 31, 2020, against the following a/cs will be
a. Accounts Receivable	80000 Dr.
b.Billings on Construction in Process	240000 Cr.
c.Construction in Process	33636.36 Cr.
the balances as at Dec 31, 2020, against the following a/cs under completed contract method for Project D --will be
a. Accounts Receivable	80000 Dr.
b.Billings on Construction in Process	240000 Cr.
c.Construction in Process	370000 Dr.
only c will change, as no revenue is recognised yet)