CHAPTER 7_TEACHER'S MANUAL_AFAR PART 1.docx

# CHAPTER 7_TEACHER'S MANUAL_AFAR PART 1.docx

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Chapter 7 Construction Contracts PROBLEM 7-1: TRUE OR FALSE 1. FALSE 6. TRUE 2. FALSE 7. TRUE 3. FALSE 8. FALSE 4. TRUE 9. FALSE 5. TRUE 10. TRUE PROBLEM 7-2: THEORY & COMPUTATIONAL 1. D 2. D 3. A 4. C 5. D 6. C 7. D 8. C 9. D 10. C 11. C 12. Solutions: Requirement (a): July 1 to Dec. 31, 20x1 Construction in progress Cash (or other appropriate accounts) to record the contract costs 120,000 120,000 The percentage of completion as of December 31, 20x1 is computed as follows: 1

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The gross profit earned in 20x1 is computed as follows: Total contract price 600,000 (a ) Costs incurred to date 120,000 Estimated costs to complete 240,000 (b ) Estimated total contract costs (see ‘bill of materials’) 360,000 Expected gross profit from contract 240,000 Multiply by: Percentage of completion (a) ÷ (b) 33 1/3% Gross profit earned to date 80,000 Less: Gross profit earned in previous years - Gross profit for the year 80,000 The revenue and cost of construction in 20x1 are computed as follows: Total contract price 600,000 Multiply by: Percentage of completion 33 1/3% Revenue to date 200,000 Less: Revenue recognized in previous yrs. - Revenue for the year 200,000 Cost of construction (squeezed) (120,000) Gross profit for the year (see computation above) 80,000 The year-end adjusting entry to recognize revenue is as follows: Dec. 31, 20x1 Cost of construction Construction in progress (gross profit) Revenue 120,00 0 80,000 200,00 0 Dec . 31, 20x 1 Receivable (600K x 33 1/3%) Progress billings (given) Contract liability to record the billing to the customer 200,000 180,000 20,000 “Receivable” is debited instead of “Contract asset” because Contractor Co. has an unconditional right to consideration for progress made on the contract. The excess of the receivable (i.e., unconditional right to consideration) over the amount invoiced to the customer (i.e., progress billing) is recognized as a contract liability. 2
Contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due ) from the customer. Dec. 31, 20x 1 Cash Receivable to record the collection on the billing 60,000 60,000 Requirement (b): Contractor Co. Statement of financial position As of December 31, 20x1 Current assets Receivable (200,000 - 60,000) 140,000 Contract asset* 20,00 0 Total current assets 160,000 Current liabilities Contract liability (see journal entries above) 20,00 0 Total current liabilities 20,00 0 *Construction in progress (120,000 + 80,000) 200,000 Progress billing (180,000) Contract asset 20,00 0 Contractor Co. Statement of profit or loss For the year ended December 31, 20x1 Revenue 200,000 Cost of construction (120,000) Gross profit 80,000 Other operating expenses - Profit for the year 80,000 13. Solutions: 20x1 20x2 3

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Total contract price 9,000,000 9,000,000 (a) Costs incurred to date 3,900,000 6,300,000 Estimated costs to complete (squeeze) 3,900,000 1,800,000 (b) Estimated total contract costs 7,800,000 8,100,000 Expected profit (loss) 1,200,000 900,000 Multiply by: % of completion (a) ÷ (b) 50% 77.7778% Profit (loss) to date 600,000 700,000 Profit recognized in prior years - (600,000) Profit (loss) for the year 600,000 100,000 20x1 20x2 Total contract price 9,000,000 9,000,000 Multiply by: % of completion 50% 77.7778% Contract revenue to date 4,500,000 7,000,000 Contract revenue in prior years - (4,500,000) Contract revenue for the year 4,500,000 2,500,000 Cost of construction (squeeze) (3,900,000) (2,400,000) Profit (loss) for the year 600,000 100,000 14. Solutions:
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• Spring '17
• Jane Smith

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