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Spiceland_Inter_Accounting8e_Ch05

CHAPTER 5 Revenue Recognition and Profitability Analysis 267 Concept Review Exercise During 2016, the Samuelson Construction Company began construction on an office building for the City of Gernon. The contract price is $8,000,000 and the building will take approximately 18 months to complete. Completion is scheduled for early in 2018. The company’s fiscal year ends on December 31. The following is a year-by-year recap of construction costs incurred and the estimated costs to complete the project as of the end of each year. Progress billings and cash collections also are indicated. LONG-TERM CONSTRUCTION CONTRACTS 2016 2017 2018 Actual costs incurred during the year $1,500,000 $4,500,000 $1,550,000 Actual costs incurred in prior years –0– 1,500,000 6,000,000 Cumulative actual costs incurred to date 1,500,000 6,000,000 7,550,000 Estimated costs to complete at end of year 4,500,000 1,500,000 –0– Total costs (actual 1 estimated) $6,000,000 $7,500,000 $7,550,000 Billings made during the year $1,400,000 $5,200,000 $1,400,000 Cash collections during year 1,000,000 4,000,000 3,000,000 Required: 1. Determine the amount of construction revenue, construction cost, and gross profit or loss to be recognized in each of the three years assuming (a) the contract qualifies for recognizing revenue over time and (b) the contract does not qualify for recognizing revenue over time. 2. Assuming the contract qualifies for recognizing revenue over time, prepare the necessary summary journal entries for each of the three years to account for construction costs, construction revenue, contract billings, and cash collections, and to close the construction accounts in 2018. 3. Assuming the contract qualifies for recognizing revenue over time, prepare a partial balance sheet for 2016 and 2017 that includes all construction-related accounts. Solution: 1. Determine the amount of construction revenue, construction cost, and gross profit or loss to be recognized in each of the three years assuming (a) the contract qualifies for recognizing revenue over time and (b) the contract does not qualify for recognizing revenue over time. The Contract Qualifies for Recognizing Revenue Over Time 2016 2017 2018 Contract price $8,000,000 $8,000,000 $8,000,000 Multiplied by % of completion* 25% 80% 100% Cumulative revenue to be recognized to date 2,000,000 6,400,000 8,000,000 Less revenue recognized in prior years –0– (2,000,000) (6,400,000) Revenue recognized this year 2,000,000 4,400,000 1,600,000 Less actual costs incurred this year (1,500,000) (4,500,000) 1,550,000 Gross profit (loss) recognized this year $ 500,000 $ (100,000) $ 50,000 *Estimated percentage of completion: 2016 2017 2018 __________1,500,000 6,000,000 6,000,000 __________ 7,500,000 5 25% 5 80% Project complete 5 100%


Spiceland_Inter_Accounting8e_Ch05
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