Question

show working and steps to complete

Example 6-4: Costs incurred during the year Estimated future costs Customer billings during the year Collections during the year 1998 1999 2000 560,000 840,000 720.000 1,040,000 700.000 300,000 500,000 1.200,000 *240.000 500,000 1,240,000 The contract price is $2 million Prepare journal entries 1. when recognizing revenue under completed contract li. when recognizing revenue over time according to percentage-of-completion Percentage completed: Is there an expected overall loss at the end of any year?

Answer 1

Journal Completed contract method :

Under this method no revenue is booked until contract is completed hence the revenue recognition entry is passed in 2000

Year	Accounts	Debit	Credit
1998	Construction in progress	560,000.00
	Accounts Payable		560,000.00
	Account receivable	300,000.00
	Billing		300,000.00
	Cash	240,000.00
	Account receivable		240,000.00
1999	Construction in progress	840,000.00
	Accounts Payable		840,000.00
	Account receivable	500,000.00
	Billing		500,000.00
	Cash	500,000.00
	Account receivable		500,000.00
2000	Construction in progress	720,000.00
	Accounts Payable		720,000.00
	Account receivable	1,200,000.00
	Billing		1,200,000.00
	Billing	2,000,000.00
	Revenue		2,000,000.00
	Construction expense	2,120,000.00
	Construction in progress		2,120,000.00

Journal Percentage of Completion Method :

Under % of completion method the % of completion is calculated with respect to Cost incurred till date / Estimated cost. This provides following :

Year 1 = 35% (560,000/(560,000+1,040,000)

Year 2 = 66.67% (560,000+840,000)/(560,000+840,000+700,000)

Year 3 = 100%

Year	Accounts	Debit	Credit
1998	Construction in progress	560,000.00
	Accounts Payable		560,000.00
	Account receivable	300,000.00
	Billing		300,000.00
	Cash	240,000.00
	Account receivable		240,000.00
	Construction in progress	140,000.00
	Construction expense	560,000.00
	Revenue		700,000.00
1999	Construction in progress	840,000.00
	Accounts Payable		840,000.00
	Account receivable	500,000.00
	Billing		500,000.00
	Cash	500,000.00
	Account receivable		500,000.00
	Construction in progress		206,666.67
	Construction expense	840,000.00
	Revenue		633,333.33
2000	Construction in progress	720,000.00
	Accounts Payable		720,000.00
	Account receivable	1,200,000.00
	Billing		1,200,000.00
	Construction in progress		53,333.33
	Construction expense	720,000.00
	Revenue		666,666.67
	Billing	2,000,000.00
	Construction in progress		2,000,000.00

Q. Is there any expected loss at the end of any year

Under % of completion method at the end of year 2 we had estimated loss of Rs.100,000 since estimated cost were 2,100,000 against revenue 2,000,0000