Problem 2. DEF enters into a long term construction contract for $3,000,000 that

Question

Problem 2. DEF enters into a long term construction contract for $3,000,000 that will take 3 years to complete. The cost of the job is estimated to be $2,600,000. The following information relates to the job over the three year period: Year 2 Year 3 Costs incurred Estimated costs to complete Progress billings Cash collections Year 1 $900,000 $1,400,000 $300,000 $1,800,000 $300,000 $1,000,000 $900,000 $1,100,000 $800,000 $700,000 $1,500,000 Prepare all entries made in each year using the percentage of completion method. Prepare all entries made in each year using the completed contract method. a. b.

Explanation / Answer

Answer a. Percentage of Completion Method Year 1 Year 2 Year 3 Cost Incurred each year (A)              900,000          1,400,000              300,000 Cost Incurred to date (B)              900,000          2,300,000          2,600,000 Estimated Costs ©          1,800,000              300,000                         -   Total Estimated Costs (D = B + C)          2,700,000          2,600,000          2,600,000 % Completed (E = B / D) 33.33% 88.46% 100.00% Revenue          1,000,000          1,653,846              346,154 Expenses              900,000          1,400,000              300,000 Gross Profit              100,000              253,846                46,154 Answer a. - Percentage of Completion Journal Entry Date Particulars Dr. Amt Cr. Amt. Year 1 1 Construction In Progress                Dr.              900,000    To Cash              900,000 2 Accounts Receivable                        Dr.          1,000,000    To Billings on Contract          1,000,000 3 Cash                                                         Dr.              800,000    To Accounts Receivable              800,000 4 Construction In Progress                Dr.              100,000 Construction Expense                     Dr.              900,000     To Construction Revenue          1,000,000 Year 2 1 Construction In Progress                Dr.          1,400,000    To Cash          1,400,000 2 Accounts Receivable                        Dr.              900,000    To Billings on Contract              900,000 3 Cash                                                         Dr.              700,000    To Accounts Receivable              700,000 4 Construction In Progress                Dr.              253,846 Construction Expense                     Dr.          1,400,000     To Construction Revenue          1,653,846 Year 3 1 Construction In Progress                Dr.              300,000    To Cash              300,000 2 Accounts Receivable                        Dr.          1,100,000    To Billings on Contract          1,100,000 3 Cash                                                         Dr.          1,500,000    To Accounts Receivable          1,500,000 4 Construction In Progress                Dr.                46,154 Construction Expense                     Dr.              300,000     To Construction Revenue              346,154 5 Billings on Contract                          Dr.          3,000,000     To Construction in Progress          3,000,000 Answer b. Completed Contract Method Year 1 Year 2 Year 3 Revenue                         -                           -      3,000,000.00 Expenses                         -                           -      2,600,000.00 Gross Profit                         -                           -          400,000.00 Answer a. - Completed Contract Method Journal Entry Date Particulars Dr. Amt Cr. Amt. Year 1 1 Construction In Progress                Dr.              900,000    To Cash              900,000 2 Accounts Receivable                        Dr.          1,000,000    To Billings on Contract          1,000,000 3 Cash                                                         Dr.              800,000    To Accounts Receivable              800,000 Year 2 1 Construction In Progress                Dr.          1,400,000    To Cash          1,400,000 2 Accounts Receivable                        Dr.              900,000    To Billings on Contract              900,000 3 Cash                                                         Dr.              700,000    To Accounts Receivable              700,000 Year 3 1 Construction In Progress                Dr.              300,000    To Cash              300,000 2 Accounts Receivable                        Dr.          1,100,000    To Billings on Contract          1,100,000 3 Cash                                                         Dr.          1,500,000    To Accounts Receivable          1,500,000 4 Construction In Progress                Dr.              400,000 Construction Expense                     Dr.          2,600,000     To Construction Revenue          3,000,000 5 Billings on Contract                          Dr.          3,000,000     To Construction in Progress          3,000,000

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