Question

Nam Construction, a sub-contractor, entered into a contract with the main contractor, Ming Company, on March 6, 2018 to provide civil engineering services at the contract fee of $10,000,000. The contract spans three years from 2018 to 2020. Costs incurred, estimated costs to complete at year-end, billings and cash collections for the life of the contract are shown below:

2018 2019 2020

Costs incurred during the year $ 4,800,000 $ 2,200,000 $ 1,800,000

Estimated costs to complete as of year-end 4,200,000 2,050,000 —

Billings during the year 3,300,000 3,200,000 3,500,000

Cash collections during the year 2,800,000 3,000,000 3,700,000

Required:

1. Using costs as a measure of the extent to which performance obligations are satisfied over time, what is the percentage of completion at the end of 2018, 2019, and 2020?

2. How much revenue related to this contract will Nam report in its 2018, 2019, and 2020 income statements?

3. What is the amount of contract profit or loss to be recognized for the Ming contract during 2018, 2019, and 2020 income statements?

4. Prepare all necessary journal entries for each of the years. Assume that construction costs are paid in cash.

5. Prepare a partial income statement to show the revenue and expenses arising from this contract in 2018, 2019, and 2020.

6. Prepare a partial but balanced statement of financial position at the end of 2018, 2019, and 2020 to show the items related to the contract, stating clearly contract asset or contract liability and other relevant accounts. Include cash balances and accumulated retained earnings.

Answer 1

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Nam Construction
Ans to 1	Calculation of Percentage complete
Particulars	2018	2019	2020
Contract Price	10,000,000	10,000,000	10,000,000	A
Cost Incurred during the year	4,800,000	2,200,000	1,800,000	B
Estimated cost to complete	4,200,000	2,050,000	-	C
Cost Incurred to date	4,800,000	7,000,000	8,800,000	D
(Sum total of the cost incurred during the year)
Estimated total cost	9,000,000	9,050,000	8,800,000	E=C+D
Percentage complete	53.33%	77.35%	100.00%	F=D/E
(Cost Incurred to date/Estimated total cost)
Answer 2
Revenue to be recognized	5,333,333	2,401,473	2,265,193	G
(Contract Price*Percentage complete)- revenue previously recognized
Year 2018: 53.33% completed. Revenue recognized = 53.33% x $ 10,000,000 = $ 5,333,333.
Year 2019: 77.35% completed. Revenue recognized = 77.35% x $ 10,000,000 – $ 5,333,333 (previously recognized) = $ 2,401,473.
Year 2020: 100% completed. Revenue recognized = 100% x $ 10,000,000 – $ 5,333,333- $ 2,401,473 (previously recognized) = $ 2,265,193.
Answer 3
Gross Profit/(Loss)	533,333	201,473	465,193	H=G-B
Billings during the year	3,300,000.00	3,200,000.00	3,500,000.00
Collection during the year	2,800,000.00	3,000,000.00	3,700,000.00

		2018			2019			2020
Ans to 4	Journal Entries	Debit $	Credit $		Debit $	Credit $		Debit $	Credit $
Costs Incurred	CIP (Work-in-progress)	4,800,000			2,200,000			1,800,000
	Cash		4,800,000			2,200,000			1,800,000
Billing	Accounts Receivable	3,300,000			3,200,000			3,500,000
	Billing on CIP		3,300,000			3,200,000			3,500,000
Receiving Payments	Cash	2,800,000			3,000,000			3,700,000
	Accounts Receivable		2,800,000			3,000,000			3,700,000
Period end adjustments for Revenue	Construction Expense	4,800,000			2,200,000			1,800,000
(Gross Profit entry)	CIP (Work-in-progress)	533,333			201,473			465,193
	Construction Revenue		5,333,333			2,401,473			2,265,193
Closing Entry	Billing on CIP							10,000,000
	CIP (Work-in-progress)								10,000,000

Answer 5
Income Statement	2018	2019	2020
Revenue recognized	5,333,333	2,401,473	2,265,193
Costs Incurred	4,800,000	2,200,000	1,800,000
Gross Profit/(Loss)	533,333	201,473	465,193

Workings for Balance Sheet
CIP (Work-in-progress)
Account	Amount ($)
Cash	4,800,000
Construction Revenue	533,333
Balance at the end of 2018	5,333,333
Cash	2,200,000
Construction Revenue	201,473
Balance at the end of 2019	7,734,807
Cash	1,800,000
Construction Revenue	465,193
Billing on CIP	(10,000,000)
Balance at the end of 2020	-
Accounts Receivable
Account	Amount ($)
Billing on CIP	3,300,000
Cash	(2,800,000)
Balance at the end of 2018	500,000
Billing on CIP	3,200,000
Cash	(3,000,000)
Balance at the end of 2019	700,000
Billing on CIP	3,500,000
Cash	(3,700,000)
Balance at the end of 2020	500,000
Billing on CIP
Account	Amount ($)
Accounts Receivable	3,300,000
Balance at the end of 2018	3,300,000
Accounts Receivable	3,200,000
Balance at the end of 2019	6,500,000
Accounts Receivable	3,500,000
CIP (Work-in-progress)	(10,000,000)
Balance at the end of 2020	-

Answer 6
Balance Sheet (Partial)	2018	2019	2020
Contract Assets:
CIP (Work-in-progress)	5,333,333	7,734,807	-
Accounts Receivable	500,000	700,000	500,000.00
Total	5,833,333	8,434,807	500,000
Contract Liabilities:
Billing on CIP	3,300,000.00	6,500,000.00	-
Total	3,300,000.00	6,500,000.00	-