P18-3 (Recognition of Profit and Entries on Long-Term Contract) On March 1, 2010
ID: 2388153 • Letter: P
Question
P18-3 (Recognition of Profit and Entries on Long-Term Contract) On March 1, 2010, Chance Company entered into a contract to build an apartment building. It is estimated that the building will cost $2,000,000 and will take 3 years to complete. The contract price was $3,000,000. The following information pertains to the construction period: 2010 2011 2012Costs to date: $600,000 $1,560,000 $2,100,000Estimated costs to complete: 1,400,000 520,000 0Progress billing to date: 1,050,000 2,000,000 3,000,000Cash collected to date: 950,000 1,950,000 2,850,000 Instructions (c) Prepare a partial balance sheet for December 31, 2011, showing the balances in the receivables and inventory accounts.Explanation / Answer
For the most part, companies recognize revenue at the point of sale (delivery) because at point of sale most of the uncertainties in the earning process are removed and the exchange price is known. Under certain circumstances, however, companies recognize revenue prior to completion and delivery. The most notable example is long-term construction contract accounting, which uses the percentage-of-completion method. Long-term contracts frequently provide that the seller (builder) may bill the purchaser at intervals, as it reaches various points in the project. Examples of long-term contracts are construction-type contracts, development of military and commercial aircraft, weapons-delivery systems, and space exploration hardware. When the project consists of separable units, such as a group of buildings or miles of roadway, contract provisions may provide for delivery in installments. In that case, the seller would bill the buyer and transfer title at stated stages of completion, such as the completion of each building unit or every 10 miles of road. The accounting records should record sales when installments are “delivered
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