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

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

Vaughn Enterprises Ltd. Requiremente Computation of balance in the contract assets/liability account at December 31, 2020 and 2021 as follows: 2020 2021 Contract Assets 1175 1015 Contract Liabilities Working Notes: 2020 2021 Particulars Assets Accounts Receivable Construction in Progress Less:Billings Costs and profit in excess of billings 400 4275 3100 1175 350 8265 7250 1015 3500 - 3100 = 400; 400 +4100 - 4150 3100 +4150 = 7250 Requirement f Computation of Statement of financial position for the year ended December 31,2021 as follows: Particulars Assets Accounts Receivable Construction in Progress Less:Billings Costs and profit in excess of billings 2021 350 8265 7250 1015 Liabilities Computation of Income Statement for the year ended December 31,2021 as follows: Particulars Revenue Recognized Less:Cost incurred during the year Gross Profit / Loss to be recognized Amount 3990 4675 -685

Requiremente The journal entries by using completed contract method as follows for year 2021, December 31: Journal Enteries Date Particulars Dec-31 Construction in Progress a/c To Various accounts (To record construction cost) Dr. Debit in $ Credit in $ 4675 4675 4100 Dec-31 Accounts Receivable a/c Dr. To Billing on construction contract (To record progress billing) 4100 Dr. 4150 Dec-31 Cash a/c To Accounts Receivable (Cash from debtors) 4150 4675 Dec-31 Cost of construction a/c Dr. To Construction in Progress To Revenue from long term contracts (To record gross profit or loss) 685 3990