Stoney Run Construction Company (U.S. GAAP) enters into a 3-year contract to bui

Question

Stoney Run Construction Company (U.S. GAAP) enters into a 3-year contract to build a new warehouse facility. Information for Years 1, 2, and 3 is shown below:

Year 1

Year 2

Year 3

Sale price

$2,800,000

$2,800,000

$2,800,000

Estimated costs

1,600,000

2,000,000

2,000,000

Costs incurred to date (paid in cash)

400,000

900,000

2,000,000

Billed to date

250,000

1,150,000

2,800,000

Received in cash to date

190,000

950,000

2,800,000

Question 4:

Calculate the gross profit booked in Year 2:

Question 5:

Book the following journal entries for Year 2:

1-Record costs incurred

2-Record billings on contract

3-Record payments received

4-Record revenue/cost during construction period

Year 1

Year 2

Year 3

Sale price

$2,800,000

$2,800,000

$2,800,000

Estimated costs

1,600,000

2,000,000

2,000,000

Costs incurred to date (paid in cash)

400,000

900,000

2,000,000

Billed to date

250,000

1,150,000

2,800,000

Received in cash to date

190,000

950,000

2,800,000

Explanation / Answer

(4) Gross Profit booked in year 2 :-

Gross Profit upto date in 2nd year – Gross Profit booked in year 1

Gross Profit Booked in year 1 :-

% complete in year 1 = Cost incurred upto date / Total Estimated cost

          = 400000/1600000 = 25%

Gross Profit = (Sale Price * % complete) – cost incurred upto date

      = (2800000 * 25%) – 400000 = $300000

Gross Profit upto date in 2nd year:-

%age of completion in year 2 = Cost incurred upto date / Total Estimated cost

                = 900000/2000000 = 45%

Gross Profit = (Sale Price * % complete) – cost incurred upto date

        = (2800000 * 45%) – 900000 = $360000

Gross Profit booked in year 2 = 3600000 – 300000 = $60000

(5) Journal Entries in year 2 :-

(i) Record costs incurred :-

Construction in Process – Dr   500000

Account Payable    - Cr    500000

(900000 – 400000 = 500000)

(ii) Record billings on contract:-

Account Receivable – Dr   900000

Billings     - Cr       900000

(1150000 – 250000 = 900000)

(iii) Record payments received :-

Cash   - Dr   760000

Account Receivable - Cr 760000

(950000 – 190000 = 760000)

(iv) Record revenue/cost during construction period:-

   Construction in Process – Dr 60000

   Construction Exp - Dr   500000

   Construction Revenue - Cr    560000

[(2800000 * 45%) – (2800000 * 25%) = 560000]

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