Question

In 2021, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2023. Information related to the contract is as follows: 2023 $2,200,000 Cost incurred during the year Estimated costs to complete as of year-end Billings during the year Cash collections during the year 2021 $2,400,000 5,600,000 2,000,000 1,800,000 2022 $3,600,000 2,000,000 4,000,000 3,600,000 4,000,000 4,600,000 Assume that Westgate Construction's contract with Santa Clara County does not qualify for revenue recognition over time. Required: 1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years. 2-a.In the journal below, complete the necessary journal entries for the year 2021 (credit "Various accounts" for construction costs incurred). 2-b.In the journal below, complete the necessary journal entries for the year 2022 (credit "Various accounts" for construction costs incurred). 2-c. In the journal below, complete the necessary journal entries for the year 2023 (credit "Various accounts" for construction costs incurred). 3. Complete the information required below to prepare a partial balance sheet for 2021 and 2022 showing any items related to the contract. 4. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information. 2021 2022 2023 Cost incurred during the year $2,400,000 $3,800,000 $3,200,000 Estimated costs to complete as of year-end 5,600,000 3,100,000 5. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information. 2021 $2,400,000 5,600,000 Cost incurred during the year Estimated costs to complete as of year-end 2022 $3,800,000 4,100,000 2023 $3,900,000

Answer 1

1) 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, 2021 $2,000,000 2022 $4,000,000 2023 $4,000,000 Billings during the year 2021 $2,400,000 $2,400,000 $5,600,000 $8,000,000 Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete as of year-end Estimated total costs 2022 $3,600,000 $6,000,000 $2,000,000 $8,000,000 2023 $2,200,000 $8,200,000 [2022=$2400000+$3600000; 2023=$6000000+$2200000] $0 $8,200,000 Contract price of this project Less: Cumulative cost to date till 2023 This contract's estimated gross profit (loss) $10,000,000 [$2000000 + $4000000 + $4000000] $8,200,000 [As calculated above] $1,800,000 --> To be recognized when the contract is completed in 2023 2021 2022 $0 $0 That is, Revenue to recognize (based on completed contract) Less: Cumulative cost to date till 2023 Gross Profit (Loss) to be recognized 2023 $10,000,000 $8,200,000 $1,800,000 $0 $0

Account Titles Requirement-2(a) 2021 Debit Credit Requirement-2(b) 2022 Debit Credit Requirement-2(c) 2023 Debit Credit $2,400,000 $3,600,000 $2,200,000 [Cost incurred during the year] Construction in progress Various Accounts (Materials, Labor, Etc.) (To record construction costs) $2,400,000 $3,600,000 $2,200,000 $2,000,000 $4,000,000 $4,000,000 [Billings during the year] Accounts receivable Billings on construction contract (To record progress billings) $2,000,000 $4,000,000 $4,000,000 $1,800,000 $3,600,000 $4,600,000 [Given] Cash Accounts receivable (To record cash collections) $1,800,000 $3,600,000 $4,600,000 No Entry $8,200,000 $1,800,000 Cost of construction No Entry Construction in progress Revenue from long-term contracts (To record gross profit (if debit) loss (if credit) [Cumulative Costs to date] [Gross profit] $10,000,000 (Balancing figure] No Entry No Entry $10,000,000 Billings on construction contract Construction in progress (To close these accounts) $10,000,000 [Total Contract Price]

3) Balance Sheet (Partial) 2021 2022 Current Assets: $200,000 $600,000 Accounts Receivable Construction in process Less: Billings Costs in excess of Billings $2,400,000 ($2,000,000) $6,000,000 ($6,000,000) [2021 = $2000000 - $1800000; 2022=$ + ($4000000 - $3600000)] [2022 = $2400000 + $3600000 = $6000000] [2022 = $2000000 + $4000000 = $6000000] $400,000 $0 Current Liabilities:

4) 2021 $2,000,000 2022 $4,000,000 2023 $4,000,000 Billings during the year 2021 $2,400,000 $2,400,000 $5,600,000 $8,000,000 Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete as of year-end Estimated total costs 2022 $3,800,000 $6,200,000 $3,100,000 $9,300,000 2023 $3,200,000 $9,400,000 [2022=$2400000+$3800000; 2023=$6200000+$3200000] $0 $9,400,000 Contract price of this project Less: Cumulative cost to date till 2023 This contract's estimated gross profit (loss) $10,000,000 ($2000000 + $4000000 + $4000000] $9,400,000 [As calculated above] $600,000 --> To be recognized when the contract is completed in 2023 2021 2022 $0 $0 That is, Revenue to recognize (based on completed contract) Less: Cumulative cost to date till 2023 Gross Profit (Loss) to be recognized 2023 $10,000,000 $9,400,000 $600,000 $0 $0

5) 2021 $2,000,000 2022 $4,000,000 2023 $4,000,000 Billings during the year 2021 2022 $2,400,000 $3,800,000 $2,400,000 $6,200,000 $5,600,000 $4,100,000 $8,000,000 $10,300,000 2023 $3,900,000 $10,100,000 [2022=$2400000+$3800000; 2023=$6200000+$3900000] Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete as of year-end Estimated total costs $o $10,100,000 Contract price of this project Less: Cumulative cost to date till 2023 This contract's estimated gross profit (loss) $10,000,000 $4,000,000 $10,100,000 [As calculated above] ($100,000) --> To be recognized when the contract is completed in 2023 2021 $0 2022 $0 That is, Revenue to recognize (based on completed contract) Less: Cumulative cost to date till 2023 Gross Profit (Loss) to be recognized 2023 $10,000,000 $ 10,100,000 ($100,000) $0 $0