Percentage_Completion_in_Class

Percentage_Completion_in_Class - COMPLETED CONTRACT AND...

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Unformatted text preview: COMPLETED CONTRACT AND PERCENTAGE-OF- COMPLETION METHODS At the beginning of 2006, the Harding Construction Company received a contract to build an office building for $5 million. The project is estimated to take three years to complete. According to the contract, Harding will bill the buyer in installments over the construction period according to a prearranged schedule. Information related to the contract is as follows: 2006 2007 2008 Construction costs incurred during the year $1,500,000 $1,000,000 $1,600,000 Construction costs incurred in prior years - 0 - 1,500,000 2,500,000 Cumulative construction costs 1,500,000 2,500,000 4,100,000 Estimated costs to complete at end of year 2,250,000 1 500 00,0 - 0 - Total estimated and actual ' construction costs $1,150,000 SiQLLQQQQ $4,100,000 Billings made during the year $1,200,000 $2,000,000 $1,800,000 Cash collections during year 1,000,000 1,400,000 2,600,000 Illustration 5—2 T5—8 PERCENTAGE-OF-COMPLETION METHOD Contract price Actual costs to date Estimated costs to complete Total project cost Total gross profit (estimated for 2006 and 2007, actual in 2008) — Contract price minus total costs Percentage-of-completion — actual costs to date divided by the estimated total project cost Total project gross profit Multiplied by the estimated % of completion Gross profit earned to date Less gross profit recognized in previous periods Gross profit recognized currently 2006 5 000 000 1 ,500,000 2,250,000 3,750,000 $L2 0000 $1 ,500.000 $3,750,000 = 40% $1,250,000 40% $ 500,000 2007 $5,000,000 2,500,000 1 ,500,000 4,000,000 5 1 £00,000 $2,500,000 $4,000,000 = 62.5% $1,000,000 62.5 % $ 625,000 N (500,000) 1.125.000 2008 $5,000,000 4,100,000 _ 0 _ 4,100,000 3 900,000 (project is complete) 100% $ 900,000 100% $ 900,000 5 625,000) 3.215.001! Illustration 5-2a T5-8 (continued) A COMPARISON OF THE TWO METHODS —— INCOME RECOGNITION Percentage-of- Completed Contract Completion Gross profit recognized: 2006 $500,000 2007 125,000 2008 275,000 $900,000 Total gross profit $200,000 $900,000 TS—9 REVENUE AND COST OF CONSTRUCTION — PERCENTAGE-OF-COMPLETION METHOD 2006 Revenue recognized ($5,000,000 x 40%) Cost of construction Gross profit $2,000,000 1,500,000 M 2007 Revenue recognized to date ($5,000,000 x 62.5%) Less: Revenue recognized in 2006 Revenue recognized Cost of construction Gross profit $3,125,000 $2,000,000) $1,125,000 1,000,000 § 125,900 2008 Revenue recognized to date ($5,000,000 x 10( %) Less: Revenue recognized in 2006 and 2007 Revenue recognized Cost of construction Gross profit $5,000,000 $3,125,000) $1,875,000 1,600,000 § 2 25,000 Illustration 5-2b T5~10 JOURNAL ENTRIES Construction in progress Cash, materials, etc. To record conslrucu'on costs. Accounts receivable Billings on construction contract To record progress billings. Cash Accounts receivable To record cash collections. PERCENTAGE-()F-COM PLETION: Construction in progress (gross profit) Cost of construction Revenue from long-term contracts To record gross pro/it. Billings on construction contract Construction in progress To close accounts. COMPLETED CONTRACT: Construction in progress (gross profit) Cost of construction Revenue from long-tenn contracts To record gross pro/it. Billings on construction contract Construction in progress To close accounts. 2006 1,500,000 1,500,000 2007 1 ,000,000 1,000,000 2008 1,600,000 1 ,600,000 1,200,000 1,200,000 2,000,000 2,000,000 1,800,000 1,800,000 1,000,000 1 ,000,000 1 ,400,000 1,400,000 2,600,000 2,600,000 500,000 1,500,000 125,000 1,000,000 275,000 1,600,000 2,000,000 1,125,000 1,875,000 ' 5,000,000 5,000,000 900,000 4,100,000 5,000,000 5,000,000 5,000,000 Illustrations 5-2c, d T5—1 1 BALANCE SHEET PRESENTATION Balance Sheet (End of year) Percentage-of-completion: Curer assets: Accounts receivable Costs and profit (52.000000) in excess of billings ($1,200.01m) Current liabilities: Billings ($3,200.000) in excess of costs and profit 63.125000) Completed contract: Current assets: Accounts receivable Costs ($1,500,000) in excess of billings ($1,200.000) Current liabilities: Billings (53.200000) in excess of costs (352.500.000) 2006 $ 200,000 800,000 $ 200,000 300,000 2007 $800,000 75,000 $800,000 700,000 Illustration 5-2e T5~12 ...
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Percentage_Completion_in_Class - COMPLETED CONTRACT AND...

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