accounting questions,,thanks

Question

Bell Company constructs office buildings. Because they can reasonably estimate the costs to completion, they use the percentage of completion method to record revenue. At the beginning of 2010, they began construction on an office building in downtown Indianapolis that will take them three years to complete. The contract was for $31,500,000. 2010 2011 2012 Costs incurred to date 13,750,000 17,100,000 28,500,000 Estimated costs to complete 13,750,000 11,400,000 -0- Billings to date 12,700,000 19,200,000 31,500,000 Collections to date 7,600,000 16,400,000 29,600,000 A. In a spreadsheet, please show all the journal entries to record the activities for all three years. (18 points) B. Please show the balance of the construction in progress and billings on construction in progress for each of the three years. Will they be reported as a net current asset or current liability recorded on the balance sheet for each year? (9 points) C. Please describe in paragraph form how your journal entries would change for all three years if Bell Company used the completed contract method instead of the percentage of completion method. (9 points)

Answer 1

Jerry:

 

A.

 

The percentage-of-completion method recognizes revenues, costs and gross profit as progress is made toward the completion of a long-term contract.

 

The first step is to just record what we know (cost of construction, progress billings and collections, respectively):

 

Dr: Construction in Process & Cr: Materials/Cash/Accounts Payable: 2010: 13,750,000; 2011: $3,350,000 ($17,100,000 - $13,750,000); 2012: $11,400,000 ($28,500,000 - $17,100,000)

 

Dr: Accounts Receivable & Cr: Billings on Construction in Process: 2010: $12,700,000; 2011: $6,500,000 ($19,200,000 - $12,700,000); 2012: $12,300,000 ($31,500,000 - $19,200,000)

 

Dr: Cash & Cr: Accounts Receivable: 2010: $7,600,000; 2011: $8,800,000 ($16,400,000 - $7,600,000); 2012: $13,200,000 ($29,600,000 - $16,400,000)

 

The second step is calculate the percent complete by costs incurred to date / most recent estimate of total costs:

 

12/31/2010: 13,750,000 / (13,750,000 + 13,750.000) = 50%

12/31/2011: 17,100,000 / (17,100,000 + 11,400,000) = 60%

12/31/2012: 28,500,000 / (28,500,000 + 0) = 100%

 

The third/final step is to record the revenue/gross profit and completion of the contact, respectively:

 

Dr: Construction in Process (Gross Profit):

Dr: Construction Expenses: 2010: 13,750,000; 2011: $3,350,000 ($17,100,000 - $13,750,000); 2012: $11,400,000 ($28,500,000 - $17,100,000)

Cr: Revenue from Long-Term Contract: 2010: $15,750,000 ($31,500,000 * 50%); 2011: $3,150,000 ($31,500,000 * 60% - $15,750,000); 2012: $12,600,000 ($31,500,000 * 100% - $15,750,000 - $3,150,000)

 

Dr: Billings on Construction in Process & Cr: Construction in Process: 2012: $31,500,000

 

B.

 

To calculate the balance of the Construction in Process and Billings on Construction in Process, I would recommend simply creating a t-account for each account and posting the entries from above in chronological order to calculate the subtotal at the end of each period.

 

At any time during the life of the contract, the difference between the Construction in Process and the Billings on Construction in Process accounts is reported on the balance sheet as a current asset if a debit (costs and recognized profit in excess of billings) or as a current liability if a credit (billings in excess of costs and recognized profit). You should be able to calculate the difference for each year using the t-accounts/amounts from the first part of B.

 

C.

 

Under the complete-contract method, revenue and gross profit are recognized only at the completion of the contract; therefore, all the entries from the first step of A would be identical; however, none of the entries from the third/final step of A would be recorded because they would replaced with the following at the end of the contract:

 

Dr: Billings on Construction in Process & Cr: Revenue from Long-Term Contracts: 2012: $31,500,000

Dr: Costs of Construction and Cr: Construction in Process: 2012: $28,500,000

 

Does all that make sense? Any questions? I hope it helps.

 

Regards,

 

Brian