Question

alls Corners Construction Limited (BCCL) specializes in the construction of commercial buildings. A typical construction project lasts between fifteen and twenty-four months. The company uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business, it is the most appropriate method. Progress toward completion is measured on a cost-to-cost basis. BCCL follows ASPE and has a December 31 year-end. On January 1, 2016, the company began work on a contract and, at the beginning of the contract, the following information was obtained: $2,000,000 Contract Price Estimated Costs Labour Materials and subcontractor Indirect costs Gross Profit $425,000 875,000 200,000 1.500.000 $ 500.000 $1,115,000 On December 31, 2016, the following represented the status of the contract: Billings on Contract issued to date Costs incurred to date Labour $207,000 Materials 519,000 Indirect costs 75.000 Latest forecast total cost of the job 801.000 1,500,000 Included in the materials costs shown above are mechanical materials stored on the job site but not yet installed. These materials cost $51,000 and are not to be included in costs incurred to date. Required: (Show all supporting calculations) (a) Using the cost-to-cost basis, calculate the percentage of completion on the contract at the end of 2016. (2 marks) (b) Calculate the amount of gross profit that would be reported on this contract at the end of 2016. (2 marks) Prepare the journal entry to record revenue and any gross profit or loss for 2016 on the books of BCCL (Narrative explanations are not required). (3 marks) (d) Assume that billings collected during 2016 amounted to $980,000. Indicate the account(s) and amount(s) that would be shown on BCCL's Statement of Financial Position as at December 31, 2016 as they relate to the construction activities of this project. (It is not necessary to show the cash account.) (4 marks) Assume the latest forecast on total costs at the end of 2060 was $2,050,000 instead of $1,500,000. How much income (loss) would Bells Corners Construction Limited report for the year 2016? (3 marks)

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Answer 1

a)

Cost of total job is $1,500,000

Billing on contract issued to date is $1,115,000

Percentage of contract is completed = Bill issued contract/ Cost of total Job*100

= $1,115,000/$1,500,000*100

= 74.33%

b)

Billing on contract issued date $1,115,000

Labour $207,000

Materials $519,000

Material stored on the job site but not installed $ 51,000

Indirect cost $ 75,000 $ 852,000

Gross Profit $ 263,000

Gross profit of the 2016 = $ 263,000

c)

Particular Debit Credit

Accounts Receivable A/C Dr $1,115,000

To Services Revenue A/C Cr $1,115,000

Labour A/C Dr $207,000

To Cash A/C Dr        $207,000

Materials A/C Dr $5,70,000

To Cash A/C Cr $5,70,000

Indirect cost A/C Dr $ 75,000

To Cash A/C Cr $ 75,000

Profit and loss A/C Dr $ 263,000

To Capital A/C Cr   $ 263,000

Total $2,230,000 $2,230,000

d)

Particular Debit Credit

Services Revenue A/C Dr $980,000

To Bank A/C Cr $980,000

Accounts Receivable A/C Dr $135,000

To Services Revenue A/C Cr $135,000

Labour A/C Dr $207,000

To Cash A/C Dr $207,000

Materials A/C Dr $5,70,000

To Cash A/C Cr $5,70,000

Indirect cost A/C Dr $ 75,000

To Cash A/C Cr $ 75,000

Profit and loss A/C Dr $ 263,000

To Capital A/C Cr   $ 263,000

Total $2,230,000 $2,230,000

e)

Assume that latest forecast on total at end of the 2016 was $2,050,000 profit  =$550,000

Forecast Total cost was 2016 was $1,50,0000 profit =$263,000

Income loss for 2016    =$2,87,000