Question

McCombs Contractors received a contract to construct a mental health facility for $2,500. Construction was begun in 2023 and completed in 2024. Cost and other data are presented below: 2024 $1,300 Costs incurred during the year Estimated costs to complete Billings during the year Cash collections during the year 2023 $1,500 1,200 1,200 1,000 1,300 1,500 1. Compute the amount of revenue and gross profit recognized during 2023 and 2024. 2. Assume that McCombs recognizes revenue on this contract over time according to percentage of completion. Prepare all journal entries for 2023 and 2024to record costs, billings, collections, profit (loss) recognition, and transferring of the asset when construction is complete. Round your answers to the nearest whole dollar. 3. Assume that McCombs recognizes revenue upon project completion according to the percentage of completion. Prepare all journal entries for 2023 and 2024 to record costs, billings, collections, and profit (loss) recognition, and transferring of the asset when construction is complete. Round your answers to the nearest whole dollar.

Answer 1

1) 2023 $1,200 2024 $1,300 Billings during the year Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete as of year-end Total costs to complete the contract 2023 $1,500 $1,500 $1,200 $2,700 2024 $1,300 $2,800 [2024=$1500+$1300) $0 $2,800 Therefore, % of completion 55.56% 100.00% [For 2023: $1500 / $2700 = 55.56%; For 2024: $2800 / $2800 = 100%] Contract price of this project Less: Cumulative cost to date till 2020 This contract's estimated gross profit (loss) $2,500 ($1200 + $1300] -$2,800 [As calculated above] -$300 --> Spread over 2 years of contract as below Contract value completed Less: Revenue recognized already till last year Revenue to be recognized Less: Cost incurred during the year Gross Profit (Loss) to be recognized 2023 $1,389 $0 $1,389 $1,500 -$111 2024 $2,500 [$2500 x 55.56%; $2500 x 100%] $1,389 [Ref: Above line] $1,111 (based on % of completion) $1,300 (Given] $189

2) Account Titles 2023 2024 Debit Debit Credit Credit $1,500 $1,300 (Cost incurred during the year] Construction in process Various Accounts (Materials, Labor, Etc.) (To record construction costs) $1,500 $1,300 $1,200 $1,300 [Billings during the year] Accounts receivable Billings on construction contract (To record progress billings) $1,200 $1,300 $1,000 $1,500 [Given] Cash Accounts receivable (To record cash collections) $1,000 $1,500 $1,500 $1,300 Construction Expenses Construction in process Revenue from long-term contracts (To record gross profit) $111 $1,389 [Cost incurred during the year] $189 [Gross Profit (Dr) or Loss (Cr) as in Part-1] $1,111 [Balancing figure] No Entry $2,500 Billings on construction contract Construction in process (To close these accounts) $2,500 (Total Contract Price]

3) Under completed-contract method, all are same as in % of completion method except for recognizing gross profit over contract's total tenure. That is, gross profit (or gross loss, if any) is recognized each year based on % of completion of total contract under percentage-of-completion method whereas total gross profit (loss) is recognized at the last year of the contract under completed-contract method as does not qualify for revenue recognition over time. Therefore, 2023 $1,200 2024 $1,300 Billings during the year Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete as of year-end Estimated total costs 2023 $1,500 $1,500 $1,200 $2,700 2024 $1,300 $2,800 [2024=$1500+$1300] $0 $2,800 Contract price of this project Less: Cumulative cost to date till This contract's estimated gross profit (loss) $2,500 ($1200 + $1300 + $] -$2,800 (As calculated above] -$300 --> To be recognized when the contract is completed in 2024 2023 $0 That is, Revenue to recognize (based on completed contract) Less: Cumulative cost to date till Gross Profit (Loss) to be recognized 2024 $2,500 -$2,800 -$300 $0

Account Titles 2023 2024 Debit Credit Debit Credit $1,300 Cost incurred during the year] Construction in process $1,500 Various Accounts (Materials, Labor, Etc.) (To record construction costs) $1,500 $1,300 $1,200 $1,300 [Billings during the year] Accounts receivable Billings on construction contract (To record progress billings) $1,200 $1,300 $1,000 $1,500 [Given] Cash Accounts receivable (To record cash collections) $1,000 $1,500 $2,800 Construction Expenses No Entry Construction in process Revenue from long-term contracts (To record gross profit (if debit) loss (if credit) (Cumulative Costs to date] $300 (Gross Profit (Dr) or Loss (Cr) as in Part-1] $2,500 (Balancing figure] No Entry $2,500 Billings on construction contract Construction in process (To close these accounts) $2,500 (Total Contract Price]