Question

E6.37 (LO 12) (Recognition of Profit on Long-Term Contract) Vaughn Enterprises Ltd. has entered into a contract beginning in February 2020 to build two warehouses for Atlantis Structures Ltd. The contract is a non-cancellable fixed price contract for $10 million. The following data pertain to the construction period (all figures in thousands).

	2020	2021	2022
Costs for the year	$3,825	$4,675	$1,200
Estimated costs to complete	4,675	1,270	–0–
Progress billings for the year (non-refundable)	3,500	4,100	2,400
Cash collected for the year	3,100	4,150	2,750

E6.39 (LO 15 ) (Recognition of Profit on Long-Term Contract—Overall Loss) Assume the facts given in E6.37 except that Vaughn's non-cancellable fixed-price contract with Atlantis is for $9.5 million. Billings and collections are lower in 2022 by $500,000 each.

	2020	2021	2022
Costs for the year	$3,825	$4,675	$1,200
Estimated costs to complete	4,675	1,270	–0–
Progress billings for the year (non-refundable)	3,500	4,100	1,900
Cash collected for the year	3,100	4,150	2,250

Instructions

a. Using the percentage-of-completion method, calculate the percent complete for 2020 and 2021. Round the percent complete to the nearest whole percentage point.

b. Calculate the amount of revenue to be recognized in 2020 and 2021.

c. Calculate the construction costs to be expensed in 2021.

d. Prepare the journal entry at December 31, 2021, to record long-term contract revenues, expenses, and losses for 2021.

e. What is the balance in the Contract Asset/Liability account at December 31, 2020 and 2021?

f. Show how the construction contract would be reported on the SFP and the income statement for the year ended December 31, 2021.

g. Assume that Vaughn uses the zero-profit or completed-contract method. What would be the journal entry recorded on December 31, 2021?

Answer 1

Answer to first 4 parts of Q# E6.39 (Requested question in the list): a) 2020 $3,500,000 2021 $4,100,000 2022 $1,900,000 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 2020 $3,825,000 $3,825,000 $4,675,000 $8,500,000 2021 $4,675,000 $8,500,000 $1,270,000 $9,770,000 2022 $1,200,000 $9,700,000 [2021=$3825000+$4675000; 2022=$8500000+$1200000] $0 $9,700,000 Therefore, % of completion 45% 87% 100% [For 2020: $3825000 / $8500000 = 45%; For 2021: $8500000 / $9770000 = 87%; For 2022: $9700000 / $9700000 = 100%] b) Contract price of this project $9,500,000 ($3500000 + $4100000+ $1900000] Less: Cumulative cost to date till 2022 $9,700,000 [As calculated above] This contract's estimated gross profit or (loss) $200,000 --> Spread over 3 years of contract as below 2020 2021 2022 Contract value completed $4,275,000 $8,265,097 $9,500,000 ($9500000 x 45%; $9500000 x 87%; $9500000 x 100%] Less: Revenue recognized already till last year $0 $4,275,000 $8,265,097 [Ref: Above line] Revenue to recognize (based on % of completion) $4,275,000 $3,990,097 $1,234,903 Less: Cost incurred during the year $3,825,000 $4,675,000 $1,200,000 (Given] Gross Profit (Loss) to be recognized $450,000 $684,903 $34,903

c) Construction costs to be expensed in 2021 $4,675,000 (= Construction costs for the year given] d) Account Titles 2021 Debit Credit $4,675,000 (Cost incurred during the year] Construction in progress Various Accounts (Materials, Labor, Etc.) (To record construction costs) $4,675,000 $4,100,000 [Billings during the year] Accounts receivable Billings on construction contract (To record progress billings) $4,100,000 $3,100,000 [Given] Cash Accounts receivable (To record cash collections) $3,100,000 $4,675,000 Cost of construction Construction in progress Revenue from long-term contracts (To record gross profit or (loss)) [Cost incurred during the year] $684,903 (Gross Profit (loss) for the year as per workings] $3,990,097 [Balancing figure] No Entry Billings on construction contract Construction in progress (To close all the accounts) [Should be equal to Total Contract Price]