Question

During 2020, Pronghorn Company started a construction job with a contract price of $1,580,000. The job was completed in 2022. The following information is available.

		2020		2021		2022
Costs incurred to date		$424,200		$820,500		$1,077,000
Estimated costs to complete		585,800		273,500		–0–
Billings to date		297,000		894,000		1,580,000
Collections to date		273,000		816,000		1,419,000

Instructions:

1. Complete a chart analyzing the above information showing revenue, the % of completion every year and the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.
2. Prepare all necessary journal entries for 2020, 2021, and 2022.
3. Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used.

Answer 1

1. Compute the amount of gross profit to be recognised each year, using percentage of completion method.

	2020	2021	2022
Contract price	$1,580,000	$1,580,000	$1,580,000
Less: Estimated cost to date	($424,200)	($820,500)	($1,077,000)
Estimated cost to complete	($585,800)	($273,500)	0
Estimated total costs	($1,010,000)	($1,094,000)	($1,077,000)
Estimated gross profit	$570,000	$486,000	$503,000
Percentage completed	42%	75%	100%
Revenue recognised in prior year	-	$239,400	$125,100
Total revenue recognised	$239,400	$364,500	$503,000
Gross profit recognised	$239,400	$125,100	$377,900

2. Journal entries

To record cost of construction

Construction in process(820,500-424,200)	$396,300
Materials,cash, payables etc		$396,300

To record process Billings

Accounts receivable(894,000-297,000)	$597,000
Billings on construction in process		$597,000

To record collections

Cash(816,000-273,000)	$543,000
Accounts receivable		$543,000

To recognise revenue and gross profit

Construction in process	$396,300
Construction expenses	$125,100
Revenue from long term contracts		$521,400

3. Amount of gross profit to be recognised each year, assuming the completed-contract method

	2020	2021	2022
Gross profit recognised (1,600,000-1,077,000)	0	0	$503,000

____×____

All the best