Question

Curtiss Construction Company, Inc., entered into a fixed-price contract with Axelrod Associates on July 1, 2018, to construct a four-story office building. At that time, Curtiss estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is $4,540,000. Curtiss concludes that the contract does not qualify for revenue recognition over time. The building was completed on December 31, 2020. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows:

	At 12-31-2018				At 12-31-2019				At 12-31-2020
Percentage of completion		10	%			60	%			100	%
Costs incurred to date	$	368,000			$	2,898,000			$	4,889,000
Estimated costs to complete		3,312,000				1,932,000				0
Billings to Axelrod, to date		729,000				2,350,000				4,540,000

Required: 1. Compute gross profit or loss to be recognized as a result of this contract for each of the three years.

2. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute gross profit or loss to be recognized in each of the three years.

3. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute the amount to be shown in the balance sheet at the end of 2018 and 2019 as either cost in excess of billings or billings in excess of costs

Answer 1

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Curtis Construction Company								2018			2019
Ans to 1 and 2	Calculation of Gross Profit						Journal Entries	Debit $	Credit $		Debit $	Credit $
Particulars	2018	2019	2020			Costs Incurred	CIP (Work-in-progress)	368,000			2,530,000
Contract Price	4,540,000	4,540,000	4,540,000	A			Cash		368,000			2,530,000
Cost Incurred to date	368,000	2,898,000	4,889,000	B
Cost Incurred during the year	368,000	2,530,000	1,991,000	C		Billing	Accounts Receivable	731,000			1,621,000
(Cost incurred to date of the present year less Cost incurred to date of the previous year)							Billing on CIP		731,000			1,621,000
Estimated cost to complete	3,312,000	1,932,000	-	D
Estimated total cost	3,680,000	4,830,000	4,889,000	E=C+B		Period end adjustments for Revenue	Construction Expense	368,000
(Cost Incurred to date+ Estimated cost to complete )						(Gross Profit entry)	CIP (Work-in-progress)	86,000
Percentage complete	10.00%	60.00%	100.00%	F=B/E			Construction Revenue		454,000
(Cost Incurred to date/Estimated total cost)
Revenue to be recognized	454,000	2,270,000	1,816,000	G		Period end adjustments for Revenue	Construction Expense				2,530,000
(Contract Price*Percentage complete)- revenue previously recognized						(Gross Profit entry)	CIP (Work-in-progress)					260,000
Year 2018: 10% completed. Revenue recognized = 10% x $ 4,540,000 = $ 454,000.							Construction Revenue					2,270,000
Year 2019: 60% completed. Revenue recognized = 60% x $ 4,540,000 – $ 454,000 (previously recognized) = $ 2,270,000.
Year 2020: 100% completed. Revenue recognized = 100% x $ 4,540,000 – $ 454,000- $ 2,270,000 (previously recognized) = $ 1,816,000.
Gross Profit/(Loss)	86,000	(260,000)	(175,000)	H=G-C
Billings to date	729,000.00	2,350,000.00	4,540,000.00
Billings during the year	731,000.00	1,621,000.00	2,190,000.00
(Billings to date of the present year less Billings to date of the previous year)
				Workings for Balance Sheet
Ans to 3				CIP (Work-in-progress)
Balance Sheet (Partial)	2018	2019		Account	Amount ($)
Current Assets:				Cash	368,000
CIP (Work-in-progress)	454,000	2,724,000		Construction Revenue	86,000
	454,000	2,724,000		Balance at the end of 2018	454,000
Current Liabilities:				Cash	2,530,000
Billing on CIP	731,000.00	2,352,000.00		Construction Revenue	(260,000)
	731,000.00	2,352,000.00		Balance at the end of 2019	2,724,000
				Billing on CIP
				Account	Amount ($)
				Accounts Receivable	731,000
				Balance at the end of 2018	731,000
				Accounts Receivable	1,621,000
				Balance at the end of 2019	2,352,000