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HMsolution-ch5b

# HMsolution-ch5b - Chapter 5(B Homework Solution and etc P...

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Chapter 5(B) Homework Solution and etc. P 5-4: Percentage-of-Completion method Contract price (i.e. total revenue for this project) is \$10,000,000 1. Calculate the amount of gross profit to be recognized in each year: 2006: Total actual costs incurred to date: \$2,400,000 Total estimated costs for the project: \$2,400,000 + estimated additional costs \$5,600,000 = \$8,000,000 Estimated % of completion = \$2,400,000 costs incurred to date \$8,000,000 total costs = 30% So, revenue to be recognized = \$10,000,000 x 30% = \$3,000,000 Since total estimated costs < contract price, cost of construction = actual costs incurred = \$2,400,000 And, gross profit = \$3,000,000 – 2,400,000 = \$600,000 2007: Total actual costs incurred to date: \$2,400,000 in 2006 + \$3,600,000 in 2007 = \$6,000,000 Total estimated costs for the project: \$6,000,000 + estimated additional costs \$2,000,000 = \$8,000,000 Estimated % of completion = \$6,000,000 costs incurred to date \$8,000,000 total costs = 75% So, total revenue to be recognized to date = \$10,000,000 x 75% = \$7,500,000 Revenue to be recognized in 2007 = \$7,500,000 – revenue recognized in 2006 \$3,000,000 = \$4,500,000 Since total estimated costs < contract price, cost of construction = actual costs incurred = \$3,600,000 And, gross profit = \$4,500,000 – 3,600,000 = \$900,000 2008: Since the project is done, % of completion = 100% So, total revenue to be recognized to date = \$10,000,000 x 100% = \$10,000,000 Revenue to be recognized in 2008 = \$10,000,000 – revenue recognized in 2006 \$3,000,000 – revenue recognized in 2007 \$4,500,000 = \$2,500,000 Cost of construction to be recognized = actual costs incurred = \$2,200,000 And, gross profit = \$2,500,000 – 2,200,000 = \$300,000 Note that total gross profit recognized over 3 years = \$600,000 + 900,000 + 300,000 = \$1,800,000 2. Prepare journal entries for each year: (in '000) 2006 2007 2008 To record actual costs incurred: Construction in progress 2,400 3,600 2,200 Various accounts 2,400 3,600 2,200 To record billings to customers Accounts receivable 2,000 4,000 4,000 Billings on construction contract 2,000 4,000 4,000 To record cash collections Cash 1,800 3,600 4,600 Accounts receivable 1,800 3,600 4,600 To record gross profit : note that gross profit is recorded into CIP Construction in progress 600 900 300 Cost of construction 2,400 3,600 2,200 Revenue from L-T contracts 3,000 4,500 2,500 To close accounts : this entry is made in the year when the project is completed

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Billings on construction contract 10,000 Construction in progress 10,000 2 3. Partial balance sheet: Note that when CIP > Billing, the excess is reported in the current assets section and when Billings > CIP, the excess is reported in current liabilities section 2006: A/R = \$2,000,000 – collection \$1,800,000 = \$200,000 CIP = actual costs \$2,400,000 + gross profit \$600,000 = \$3,000,000 Billings = \$2,000,000 CIP > Billings, so the excess is reported in the current assets section Partial balance sheet for 2006: Current assets : A/R ............................................................. \$ 200,000 Construction in progress ............................ \$3,000,000 Less: Billings on construction contract ...... (2,000,000) CIP in excess of billings ............................ 1,000,000 2007: A/R = BB \$200,000 + \$4,000,000 – collection \$3,600,000 = \$600,000 CIP = BB \$3,000,000 + actual costs \$3,600,000 + gross profit \$900,000 = \$7,500,000 Billings = BB \$2,000,000 + \$4,000,000 = \$6,000,000 CIP > Billings, so the excess is reported in the current assets section
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