Question

Fender period. Construction Company receives a contract to construct a building over a 3 year Information relating to the performance of the contract is summarized as follows: 2015 2016 2017 S 16,000,000 Cumulative construction costs incurred to date Estimated costs to complete Billings during the year Cash collected during the year 6,000,000 8,000,000 6,000,000 3,000,000 8,000,000 7,000,000 4,000,000 5,000,000 Required: 1. How much is Fender Construction charging to build this athletic stadium? In other words, what is the contract price of the project? 2 What was the estimated gross profit at the time the contract was negotiated? Using the percentage-of-completion method, compute the estimated gross profit 4. Prepare the journal entries related to the profit recognition process for years 2015-2017 5. Prepare the journal entries related to the profit recognition process for years 2015-2017 6. Does Fender's client have an oustanding balance related to the construction project at 7. Explain what happened between Fender's budgeted versus actual costs between 2016 3. recognized in the years 2015-2017. under the percentage-of-completion method. under the completed contract method. the end of 2017? If so, how much? and 2017. Suppose Fender expected total costs to increase by 67% in 2016, what would be the impact to the project? Refer to #8, if this is the case, how would you account for the impact of the expected cost increase referred in #8?

Answer 1

Answer to first 4 parts of the guestion: Requirement-1: 2015 2016 2017 Billings during the year $8,000,000 $8,000,000 $4,000,000 $20,000,000 S8,000,000+$8,000,000 $4,000,000 $12,000,000] Contract price of this project [Sum of total billings during the year from year-1 thru 3] Requirement-2: Contract price of this project Less: Cumulative cost to date till 2017 This contract's estimated gross profit when negotiated $20,000,000 [As calculated in Part-1] $18,000,000 [Given] $2,000,000 Requirement-3 2015 2016 2017 $8,000,000 $16,000,000 $18,000,000 [Given] Cumulative Cost incurred to date Add: Estimated costs to complete as of year-end Estimated total costs $0 $14,000,000 $19,000,000 $18,000,000 6,000,000 $3,000,000 Therefore, % of completion 57.14% 84.21% 100.00% [Cost incurred to date / Estimated total costs] x 100 ($8m/$14m) ($16m/$19m) (S18m/$18m)

2015 2016 2017 $20,000,000 [$20m x 57.14%; $20m x 84.2196; 20m x 100.00%) Contract value completed Less: Revenue recognized already till last year Revenue to recognize (based on % of completion) Less: Cost incurred during the year Gross Profit (Loss) to be recognized $11,428,571 $16,842,105 $0 -$11,428,571 -$16,842,105 [Ref: Above linel $11,428,571 5,413,534 $3,157,895 $8,000,000 -$8,000,000 -$2,000,000 [2016 $16m-$8m-$8m; 2017-$18m-$16m-$2m]

Requirements 4: Account Titles 2015 2016 2017 Debit Credit Debit Credit Debit Credit Construction in progress $8,000,000 $8,000,000 $2,000,000 [Cost incurred during the year] $8,000,000 $8,000,000 $2,000,000 Various Accounts (Materials, Labor, Etc.) To record construction costs Accounts receivable $8,000,000 $8,000,000 $4,000,000 [Billings during the year] $8,000,000 $8,000,000 $4,000,000 Billings on construction contract To record progress billings) Cash $6,000,000 $7,000,000 $5,000,000 [Given] $6,000,000 $7,000,000 $5,000,000 Accounts receivable To record cash collections Cost of construction Construction in progress $8,000,000 $3,428,571 $8,000,000 $2,000,000 [Cost incurred during the year] [Gross Profit (loss) for the yearas per Part-3] $2,586,466 $1,157,895 $5,413,534 $11,428,571 3,157,895 [Balancing figure] Revenue from long-term contracts To record gross profit Billings on construction contract No Entry No Entry $20,000,000 $20,000,000 [Total Contract Price] Construction in progress To close these accounts