Question

Sad Construction Company uses the percentage-of-completion method when total con- struction costs can be estimated. Sad is building an office building for Porter Company for $10,000,000 with the following details: 12/31/2004 12/31/2005 12/31/2006 Costs incurred to date $2,000,000 $3,500,000 $6,500,000 Estimated costs to complete 6,000,000 4,500,000 1,500,000 Billings to date 6,000,000 8,000,000 10,000,000 Collections to date 3,000,000 5,500,000 10,000,000 Required: 1. Prepare all journal entries for 2004 that Sad should make for this job. 2. Prepare all journal entries for 2005 that Sad should make for this job.

Answer 1

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1. Journal Entries for 2004 that Sad should make for this job: Credit: (i) cost incurred to date of $2,000,000. Year Accounts Construction-in-Progress (CIP) 2004 Cash Debit: $ 20,00,000 $ 20,00,000 (ii) Bill issued to Porter Company of $6,000,000. Porter Company 2004 Billing on CIP $ 60,00,000 $ 60,00,000 (iii) Collection to date $3,000,000. Cash 2004 Porter Company $ 30,00,000 $ 30,00,000 (iv) Year end adjustment entry. Construction-in-Progress 2004 Construction Expense Construction Revenue $ $ 5,00,000 20,00,000 $ 25,00,000

2. Journal Entries for 2005 that Sad should make for this job: Credit: (i) cost incurred to date of $1,500,000. Year Accounts Construction-in-Progress (CIP) 2005 Cash Debit: $ 15,00,000 $ 15,00,000 000. (ii) Bill issued to Porter Company of $2,000,000. Porter Company 2005 Billing on CIP $ 20,00,000 $ 20,00,000 (iii) Collection to date $2,500,000. Cash 2005 Porter Company $ 25,00,000 $ 25,00,000 (iv) Year end adjustment entry. Construction-in-Progress 2005 Construction Expense Construction Revenue $ 3,75,000 15,00,000 $ 18,75,000

Workings: 2005 (i) Cumulative cost incurred: ü) Cost incurred in the year: (("CIP" and "Construction Expense") (iii) Estimated cost to complete: (iv) Total cost required: (i + iii) (v) Contract Price: |(vi) Percentage of completion in the year (ii/iv) x 100: (vii) Construction revenue (v x vi): |(viii) Construction-in-Progress [i.e. profit] (vii - ii): $ $ $ $ $ 2004 20,00,000 $ 20,00,000 $ 60,00,000 $ 80,00,000 $ 1,00,00,000 $ 25% 25,00,000 $ 5,00,000 $ 35,00,000 15,00,000 45,00,000 80,00,000 1,00,00,000 18.75% 18,75,000 3,75,000 $ $
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