Question

Revenue Recognition Percentage Complete: Cost Basis, Test #1 The City of Denver, Colorado contracted with Wenwegetoit Construction to build a ship dock for a deep-sea port in Denver. The project is expected to take three years to complete. ($ millions) $ 25.00 Expected Revenue (contract amount in millions of dollars) $ millions) Project Started 20X1 20X2 18.00 $ 20.00 $ 8.00 $ 9.50 $ 9.00 $ 10.00 $ 8.50 $ 9.50 $ Estimated Total Cost (per Engineering) Actual Cost (each year only) Progress Billings (each year only) Cash Received (each year only) Project Finished 20X3 20.50 3.00 6.00 7.00 $ $ $ Prepare all journal entries required to account for the project? Round all percentages and dollars to two decimal places.

Answer 1

The accounting treatment is given in accordance with IFRS15

In Year 1 :

Cost incurred = $8 million

Estimated total cost = $18 million

% of completion = $8/$18 = 44.44%

Contract Revenue to be recognised = $25 million x 44.44% = $11.11 million

In Year 2 :

Cost incurred till date = $9.5 m + $8 m = $17.5 million

Total estimated cost = $20 million

% of completion = $17.5/$20 = 87.5%

Contract Revenue to be recognised till date = $25 million x 87.5% = $21.875 million

Contract Revenue recognised in previous year = $11.11 million

So Revenue recognised this year = $10.765

In Year 3 :

Total cost = $20.5 million

Total Revenue = $25 million

Revenue already recognised = $11.11m + $10.765m = $21.875 million

Revenue to be recognised in current year = $3.125 million

Journal Entries

In 20X1

Contract Costs $8 million

Cash $8 million

(Costs incurred for construction)

At end of 20X1

Cost of goods sold $8 million

Contract Costs $8 million

(Construction costs transferred to Cost of goods sold)

Contract Asset $11.11 million

Contract Revenue $11.11 million

(Progress Billings made are now accounted)

Accounts Receivable $9 million

Progress Billings $9 million

(Progress Billings of worth $9 million made)

Cash $8.5 million

Accounts Receivable $8.5 million

(Amount received from client)

In 20X2

Contract Costs $9.5 million

Cash $9.5 million

At end of 20X2

Cost of goods sold $9.5 million

Contract Costs $9.5 million

Contract Asset $10.765 million

Contract Revenue $10.765 million

Accounts Receivable $10 million

Progress Billings $10 million

Cash $9.5 million

Accounts Receivable $9.5 million

In 20X3

Contract Costs $3 million

Cash $3 million

At end of 20X3

Cost of Goods Sold $3 million

Contract Costs $3 million

Contract Asset $3.125 million

Contract Revenue $3.125 million

Accounts Receivable $6 million

Progess Billings $6 million

Cash $7 million

Accounts Receivable $7 million

At the year end in balance sheet, the net off Contract Asset and Progress Billings is shown on assets side along with Accounts Receivable.

Note :

In the above entries, instead of "contract asset" we can also use "Construction WIP"

Narrations will be similar for year 2, year 3. Hence not repeated