In 2013, the Westgate Construction Company entered into a contract to construct
ID: 2483102 • Letter: I
Question
In 2013, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2015. Information related to the contract is as follows:
1.
Calculate the amount of gross profit (loss) to be recognized in each of the three years. (Do not round intermediate calculations.)
2.1
In the journal below, complete the necessary journal entries for the year 2013 (credit various accounts for construction costs incurred). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations.)
2.2
In the journal below, complete the necessary journal entries for the year 2014 (credit various accounts for construction costs incurred). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations.)
2.3
In the journal below, complete the necessary journal entries for the year 2015 (credit various accounts for construction costs incurred). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations.)
3.
Complete the information required below to prepare a partial balance sheet for 2013 and 2014 showing any items related to the contract. (Do not round intermediate calculations.)
4.
Calculate the amount of gross profit (loss) to be recognized in each of the three years, assuming the following costs incurred and costs to complete information. (Do not round intermediate calculations.)
Calculate the amount of gross profit (loss) to be recognized in each of the three years, assuming the following costs incurred and costs to complete information. (Do not round intermediate calculations.)
2013 2014 2015 Cost incurred during the year $ 3,600,000 $ 4,050,000 $ 1,485,000 Estimated costs to complete as of year-end 5,400,000 1,350,000 0 Billings during the year 3,000,000 4,650,000 2,350,000 Cash collections during the year 2,700,000 4,600,000 2,700,000
Explanation / Answer
Solution.
Calculate the amount of gross profit (loss) to be recognized in each of the three years
2013
Cost incurred todate $3,600,000
+ Estimated costs to complete as of year-end 5,400,000
= Estimated total costs $9,000,000
% of completion = $3,600,000 / $9,000,000 = 40%
Revenue to be recognised = $10m x 40% = $4,000,000
- Cost incurred $3,600,000
= Gross profit $400,000
2014
Cost incurred to date $7,650,000
+ Estimated costs to complete as of year-end 1,350,000
= Estimated total costs $9,000,000
% of completion = $7,650,000 / $9,000,000 = 85%
Revenue to be recognised todate = $10m x 85% = $8,500,000, but you already recognised $4 m in 2013, so that leaves $4,500,000 to be recognised in 2014
Revenue to be recognised in 2014 $4,500,000
- Cost incurred in 2014 $4,050,000
= Gross profit $450,000
2015
Cost incurred todate $9,135,000
+ Estimated costs to complete as of year-end 0
= Estimated total costs $9,135,000
% of completion = 100%
Revenue to be recognised todate = $10m x 100% = $10,000,000, but you already recognised $4m in 2013, and $4,500,000 in 2014, so that leaves $2,500,000 to be recognised in 2015
Revenue to be recognised in 2015 $2,500,000
- Cost incurred in 2015 $ 1,485,000
= Gross profit $1,015,000
2.
4 necessary journal entries for the year 2013
Record construction costs.
Dr WIP $3,600,000
Cr Cash/Accounts payable $3,600,000
Record progress billings.
Dr Accounts receivable 3,000,000
Cr Progress billings 3,000,000
Record cash collections.
Dr Cash 2,700,000
Cr AR 2,700,000
Record gross profit.
Dr Progress billings $400,000
Cr Revenue $400,000
Dr Cost of services $3,600,000
Cr WIP $3,600,000
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