266 SECTION 1 The Role of Accounting as an Information System 2016 Revenue recognized ($5,000,000 3 40%) $2,000,000 Cost of construction (1,500,000) Gross profit $ 500,000 2017 Revenue recognized to date ($5,000,000 3 54.12%)* $2,706,000 Less: Revenue recognized in 2016 (2,000,000) Revenue recognized $ 706,000 Cost of construction† (1,306,000) Loss $ (600,000) 2018 Revenue recognized to date ($5,000,000 3 100%) $5,000,000 Less: Revenue recognized in 2016 and 2017 (2,706,000) Revenue recognized $2,294,000 Cost of construction† (2,394,000) Loss $ (100,000) *$2,760,000 4 $5,100,000 5 54.12% †The difference between revenue and loss Illustration 5–24G Allocation of Revenue and Cost of Construction to Each Period—Loss on Entire Project The journal entries to record the losses in 2017 and 2018 are as follows: 2017 Cost of construction .................................................................... 1,306,000 Revenue from long-term contracts .......................................... 706,000 Construction in progress (CIP) ................................................. 600,000 2018 Cost of construction .................................................................... 2,394,000 Revenue from long-term contracts .......................................... 2,294,000 Construction in progress (CIP) ................................................. 100,000 Recognizing revenue over time in this case produces a large overstatement of income in 2016 and a large understatement in 2017 because of a change in the estimation of future costs. These estimate revisions happen occasionally when revenue is recognized over time. When the contract does not qualify for recognizing revenue over time, no revenue or cost of construction is recognized until the contract is complete. In 2017, a loss on long-term contracts (an income statement account) of $100,000 is recognized. In 2018, the income statement will report revenue of $5,000,000 and cost of construction of $5,100,000, combining for an additional loss of $100,000. The journal entries to record the losses in 2017 and 2018 are as follows: 2017 Loss on long-term contracts ........................................................ 100,000 Construction in progress (CIP) ................................................. 100,000 2018 Cost of construction .................................................................... 5,100,000 Revenue from long-term contracts .......................................... 5,000,000 Construction in progress (CIP) ................................................. 100,000 Recognized losses on long-term contracts reduce the CIP account.
Spiceland_Inter_Accounting8e_Ch05
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