The board of directors of ogle construction company

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The board of directors of Ogle Construction Company is meeting to choose between the completed-contract method and the percentage-of-completion method of accounting for long-term contracts in the company's financial statements. You have been engaged to assist Ogle's controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information: 1. Ogle commenced doing business on January 1, 2011. 2. Construction activities for the year ended December 31, 2011, were as follows: Total Contract Billings Through Cash Collections Project Price 12/31/11 Through 12/31/11 A $ 515,000 $ 340,000 $ 310,000 B 690,000 210,000 210,000 C 475,000 475,000 390,000 D 200,000 100,000 65,000 E 480,000 400,000 400,000 $2,360,000 $1,525,000 $1,375,000 Contract Costs Estimated Incurred Through Additional Costs to Project 12/31/11 Complete Contracts A $ 424,000 $101,000 B 195,000 455,000 C 350,000 -0- D 123,000 97,000 E 320,000 80,000 $1,412,000 $733,000 3. Each contract is with a different customer. 4. Any work remaining to be done on the contracts is expected to be completed in 2012. 18 - 44
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Revenue Recognition Instructions (a) Prepare a schedule by project, computing the amount of income (or loss) before selling, general, and administrative expenses for the year ended December 31, 2011, which would be reported under: (1) The completed-contract method. (2) The percentage-of-completion method (based on estimated costs). (b) Prepare the general journal entry(ies) to record revenue and gross profit on project B (second project) for 2011, assuming that the percentage-of-completion method is used. (c) Indicate the balances that would appear in the balance sheet at December 31, 2011 for the following accounts for Project D (fourth project), assuming that the percentage-of-completion method is used. Accounts Receivable Billings on Construction in Process Construction in Process (d) How would the balances in the accounts discussed in part (c) change (if at all) for Project D (fourth project), if the completed-contract method is used? Solution 18-133 (a) (1) and (2) Projects A B C D E Contract price $515,000 $690,000 $475,000 $200,000 $480,000 Contract costs incurred 424,000 195,000 350,000 123,000 320,000 Additional costs to complete 101,000 455,000 -0- 97,000 80,000 Total cost 525,000 650,000 350,000 220,000 400,000 Total gross profit or (loss) $ (10,000 ) $ 40,000 $125,000 $ (20,000 ) $ 80,000 The amount reported as income (loss) under the completed-contract method for 2011 is: Project A $(10,000) B -0- C 125,000 D (20,000) E -0- $ 95,000 The amount reported as income (loss) under the percentage-of-completion method for 2011 is: Project A $(10,000) B 12,000 $40,000 × ($195,000 ÷ $650,000) C 125,000 D (20,000) E 64,000 $80,000 × ($320,000 ÷ $400,000) $171,000 18 - 45
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Test Bank for Intermediate Accounting, Thirteenth Edition Solution 18-133 (cont.) (b) Construction in Process ................................................................ 12,000 Construction Expenses ................................................................. 195,000 Revenue from Long-term Contracts .................................. 207,000 (c) Billings $100,000 Cash collections 65,000 Accounts receivable $ 35,000 Billings on Construction in Process 100,000 Costs incurred $123,000 Loss reported (20,000 ) Construction in process $103,000 (d) The account balances would be the same. Pr. 18-134 —Long-term contract accounting (completed-contract). Evans Construction, Inc. experienced the following construction activity in 2011, the first year of operations.
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