XYZ Construction Company has contracted to build an office building. The constru
ID: 2559813 • Letter: X
Question
XYZ Construction Company has contracted to build an office building. The construction is scheduled to begin on 1/1/15, and the estimated time of completion is 7/1/18. The building cost is estimated to be $40,000,000 and will be billed at $48,000,000. The following data relate to the construction period. 2015 2016 2017 2018 $11,000,000 $20,000,000 $27,000,000 $40,000,000 Costs to date Estimated cost to complete Progress billings to date Cash collected to date 29,000,000 20,000,000 13,000,000 6,000,000 18,000,000 28,000,000 48,000,000 6,000,000 15,000,000 25,000,000 48,000,000 Required: (a) Compute the estimated gross profit for 2015, 2016, 2017 and 2018 assuming that the percentage-of-completion method is used. (b) Prepare the necessary journal entries for XYZ for the years 2017 and 2018. (c) Show the relevant balance sheet and income statement sections for 2017Explanation / Answer
a. Compuatation of gross profit for 2015, 2016, 2017 and 2018
2015
Gross profit for first year = Total estimated profit of the contract x Percentage of completion
Total estimated profit = Total contract revenue - Total estimated cost
= 48,000,000 - (11,000,000 + 29,000,000)
= $8,000,000
Percentage of completion = Cost to date / Total estimated cost
= 11,000,000 / 40,000,000 = 27.50%
So, Gross profit for year 2015 = 8,000,000 x 27.5% = $2,200,000
2016
Gross profit for subsequent years = Total estimated profit of the contract x Percentage of completion - Profits recognized in previous years
Total estimated profit = Total contract revenue - Total estimated cost
= 48,000,000 - (20,000,000 + 20,000,000)
= $8,000,000
Percentage of completion = Cost to date / Total estimated cost
= 20,000,000 / 40,000,000 = 50%
So, Gross profit for year 2016 = (8,000,000 x 50%) - 2,200,000 = $1,800,000
2017
Gross profit for subsequent years = Total estimated profit of the contract x Percentage of completion - Profits recognized in previous years
Total estimated profit = Total contract revenue - Total estimated cost
= 48,000,000 - (27,000,000 + 13,000,000)
= $8,000,000
Percentage of completion = Cost to date / Total estimated cost
= 27,000,000 / 40,000,000 = 67.50%
So, Gross profit for year 2017 = (8,000,000 x 67.50%) - (2,200,000 + 1,800,000) = $1,400,000
2018
Gross profit for last year = Total profit of the contract - Profits recognized in previous years
Total profit of the contract = Total contract revenue - Total cost
= 48,000,000 - 40,000,000
= $8,000,000
So, Gross profit for year 2018 = 8,000,000 - (2,200,000 + 1,800,000 + 1,400,000)= $2,600,000
b. Journal entries for XYZ for the years 2017 and 2018
c. Balance Sheet and income statement sections for 2017
Balance Sheet
Income Statement
Description Debit Credit 2017 Construction in Progress (27,000,000 - 20,000,000) $7,000,000 Accounts Payable (or Cash) $7,000,000 Construction in Progress $1,400,000 Construction Expenses (27,000,000 - 20,000,000) $7,000,000 Construction Revenues $8,400,000 Accounts Receivable (28,000,000 - 18,000,000) $10,000,000 Progress Bilings $10,000,000 Cash (25,000,000 - 15,000,000) $10,000,000 Accounts Receivable $10,000,000Related Questions
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