MSK Construction Company contracted to construct a factory building for $525,000

Question

MSK Construction Company contracted to construct a factory building for $525,000. Construction started during 2019 and was completed in 2020. Information relating to the contract follows:

Required:

Record the preceding transactions in MSK’s books assuming it recognizes revenue over time and uses costs incurred to measure the extent to which its performance obligation has been satisfied.

Record the preceding transactions in MSK’s books assuming it recognizes revenue at a point in time when control of the completed factory is transferred to the customer at the end of the project.

2019 2020 Costs incurred during the year $ 290,000 $ 150,000 Estimated additional cost to complete 145,000 — Billings during the year 260,000 265,000 Cash collections during the year 240,000 285,000

Explanation / Answer

Requirement:1 Year:1 Amt in $ Total cost incurred till 1st year 290000 Estimated cost of completion 145000 Total cost 435000 Total amount agreed for construction 525000 Estimated total profit (525000-435000) 90000 Gross profit Ratio on cost (90000/435000) 0.206897 Profit for the 1st year 60000 (0.206897 x 290000) =60000 Amount to be recognised as revenue 350000 (60000+290000) Year:2 Amt in $ Total cost incurred for 2 years 440000 (290000+150000) Total amount agreed for construction 525000 Actual profit for building construction 85000 Profit already recognised in previous year 60000 Profit to be recognised in 2nd year 25000 So revenue for 2nd year is 175000 (150000+25000) or (525000-350000) Journal entries Year 1 Debit ($) Credit ($) 1. Expense or purchases A/C       Dr 290000 To Cash or Bank A/c 290000 ( Being expenses incurred for construction) 2. Cash A/c Dr 240000 A/C's recievable A/c Dr 110000 To Sales or income A/c 350000 ( Being revenue recognised for construction of building) Year 2 Debit ($) Credit ($) 1. Expense or purchases A/C       Dr 150000 To Cash or Bank A/c 150000 ( Being expenses incurred for construction) 2. Cash A/c Dr 285000 To Sales or income A/c 175000 To A/C's receivable A/c 110000 ( Being revenue recognised for construction of building) Requirement:2 year:1 Amt in $ Total cost incurred till 1st year 290000 Revenue to be recognised for 1st year *290000 * Since the company doesn't recognise any profit till the control of factory is transferred to customer, it recognises revenue(sales) upto cost(expenses) year:2 Amt in $ Total cost incurred in second year 150000 Agreed amount of contract 525000 Revenue recognised in 1st year 290000 revenue (sales or income) to be recognised in 2nd year 235000 (525000-290000) Total profit recognised in 2nd year 85000 (235000-150000) Journal entries year:1 Debit ($) Credit ($) 1. Expense or purchases A/C       Dr 290000 To Cash or Bank A/c 290000 ( Being expenses incurred for construction) 2. Cash A/c Dr 240000 A/C's recievable A/c Dr 50000 To Sales or income A/c 290000 ( Being revenue recognised for construction of building) year:2 Debit ($) Credit ($) 1. Expense or purchases A/C       Dr 150000 To Cash or Bank A/c 150000 ( Being expenses incurred for construction) 2. Cash A/c Dr 285000 To Sales or income A/c 235000 To A/C's receivable A/c 50000 ( Being revenue recognised for construction of building)

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