Question

1) Wind and Water Energy Company hired Smith Construction Corporation to build a new building for its operation. Smith agreed to build the plant for $1,200,000, and Wind and Water Energy agreed to pay Smith $300,000 on January 1 and July 1 for two years, beginning July, 2006. Smith estimates that it will incur total costs of $950,000 to complete construction. The following details at December 31, 2006:

Costs incurred to date $400,000

  Estimated costs to complete     550,000

Billings to date    300,000

Collections to date 300,000

  Required:

1. Calculated the amount of income that Smith should recognize for 2006, using the percentage-of-completion method.

2) Sad Construction Company use the percentage-of-completion method when total Construction can be estimated. Sad is building an office building for Porter Company for $10,000,000 with the following details:

   12/31/2004 12/31/2005 12/31/2006

Costs incurred to date    $2,000,000 $3,500,000 $6,500,000

Estimated costs to complete 6,000,000   4,500,000 1,500,000

Billing to date 6,000,000 8,000,000 10,000,000

Collections to date   3,000,000 5,500,000 10,000,000

Required:

1. Prepared all journal entries for 2004 that Sad should make for this job.

2. Prepared all journal entries for 2005 that Sad should make for this job.

Answer 1

Particulars Contract price (1) Cost incurred to date (A) Add Estimated cost to incur (B) Total Estimated Cost (A +B) = (C) Total Profit or loss Recognized (1-C)= (D) Percentage of Completion (A/C)=(E) Total gross profit recognized (D E ) Less gross profit recognize in previous year Gross profit or loss recognized in current year 2006 1,200,000 400,000 550,000 950,000 250,000 42.11% 105,263 105,263 Income that Smith should recognize for 2006 105,263 Note; As per rules I have answered the first question.