Accounting for construction contract Construct Pty Ltd uses the percentage of co

Question

Accounting for construction contract

Construct Pty Ltd uses the percentage of completion method of accounting for construction contracts. In 2011 Construct Pty Ltd entered into a contract to build a commercial building with a contract price of $4,200,000 for Kairns Ltd. The details relating to the contract are as follows:

2011 2012
$ $
Costs incurred during the year 300,000 2,750,000
Estimated costs to complete at 30 June 2,400,000 0
Billings during the year 720,000 3,480,000
Collections during the year 500,000 3,200,000
Required:

(a) Calculate the amount of profit to be recognised by Construct Pty Ltd for the two years.

(b) Prepare the general journal entries for both years, assuming the outcome of the contract can be reliably estimated.

Explanation / Answer

a) $225,000 Year 1 and $1,225,000 Year 2 Year 1 Completion: 12.5% ($300,000/$2,700,000) Gross Profit: $1,800,000 ($4,200,000-$2,700,000) Year 1 Profit: $225,000 ($1,800,000 * 0.125) Year 2 Completion: 87.5% (100% - 12.5%) Gross Profit: $1,150,000 ($4,200,000-$3,050,000) Year 2 Profit: $925,000 ($1,150,000-$225,000) b) Year 1 Debit Construction in Process 300,000 Credit Accounts Payable 300,000 Debit Accounts Receivable 720,000 Credit Progress Billings 720,000 Debit Construction in Process 225,000 Debit Construction Expenses 300,000 Credit Construction Revenue 525,000 Year 2 Debit Construction in Process 2,750,000 Credit Accounts Payable 2,750,000 Debit Accounts Receivable 3,480,000 Credit Progress Billings 3,480,000 Debit Construction in Process 925,000 Debit Construction Expenses 2,750,000 Credit Construction Revenue 3,675,000 Debit Progress Billings 4,200,000 Credit Construction in Process 4,200,000

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