E18-7 (Recognition of Profit, Percentage-of-Completion) In 2007 Jeff Rouse Const

Question

E18-7 (Recognition of Profit, Percentage-of-Completion) In 2007 Jeff Rouse Construction Company
agreed to construct an apartment building at a price of $1,000,000. The information relating to the costs
and billings for this contract is shown below.
2007 2008 2009
Costs incurred to date $280,000 $600,000 $ 785,000
Estimated costs yet to be incurred 520,000 200,000 –0–
Customer billings to date 150,000 400,000 1,000,000
Collection of billings to date 120,000 320,000 940,000
Instructions
(a) Assuming that the percentage-of-completion method is used, (1) compute the amount of gross
profit to be recognized in 2007 and 2008, and (2) prepare journal entries for 2008.
(b) For 2008, show how the details related to this construction contract would be disclosed on the
balance sheet and on the income statement.

Explanation / Answer

2007 2008 construction cost of the apartment $1,000,000 $1,000,000 Cost incurred in 2007 for the construction $280,000 $600,000 Estimated cost to complete $520,000 $200,000 Estimated total cost $800,000 $800,000 Estimated total gross profit $200,000 $200,000 percent complete      280000/1000000 28% 60% percentage of complete in2008 = 600000/1000000 percentage of complete in2009 =785000/1000000 Journal entries To record cost of construction $2,007 2008 construction in process $280,000 $320,000       Materials , cash , payables $280,000 $320,000 To record progress billing Accounts receivables $150,000 $400,000       Bills on construction in process $150,000 $400,000 to record collection of cash Cash $120,000 $320,000       Accounts receivbles $120,000 $320,000 Revenue recognization 2007 2008 2007 28% 1000000 $280,000 2008   60% 1000000 600000 Less; Revenue recognized in 2007 $280,000 Revenue in 2008 $320,000 Gross profit recognized in: 2007             1000000*28% $280,000 2008        1000000*60% $600,000 Less: Gross profit recognized in 2007 $280,000 Gross profit in 2008 $320,000 To recognise revenue and gross profit Construction in process (gross profit) $280,000 $320,000 construction expenes $280,000 $600,000 Revenue from long term contract $560,000 $920,000

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