Question

Case Study 2: What are the proper entries for the following three transactions listed in the following three questions?

American Construction Company, Inc. started operations on January 2, 2010. American was awarded the contract for Project 101 during January. Bid price was $200,000. Estimated project cost was $180,000. Review the demonstration problem within the text for a complete explanation for entering January’s transactions into the general journal, posting to account ledgers, closing out and finding ending balances for accounts as appropriate, and preparing January’s income statement, and balance sheet.

During February, the second month of operations, American completed Project 101 and began Project 102. The contract amount for Project 102 was $500,000. Estimated project cost was $400,000. The following transactions occurred during February:

Question 6: Payroll disbursements: Project 101 - $20,000 of which $5,000 was for January labor used but not paid for; Project 102 - $15,000; Office wage - $1,500 of which $500 was for January wage used but not paid for; Salaries - $3,000. (4 points)

Question 7: Progress billing sent to clients: Project 101 - $80,000; Project 102 - $100,000. (10% retention) (4 points)

Question 8: Subcontractor billings: Project 101 - $45,000; Project 102 - $50,000. (10% retention) (4 pints)

Answer 1

Question - 6 - Payroll disbursements

Particulars	Debit ($)	Credit ($)
Labor a/c Dr	30,000
Outstanding Labor a/c Dr	5,000
Office Wage a/c Dr	1,000
Outstanding Wage a/c Dr	500
Salaries a/c Dr	3,000
To Cash a/c		39,500

The above is the payroll disbursements journal entry for the month of February. The Labor amount for Project 101 for Jan is $5,000 so the its payment is debited to outstanding labor a/c. The Labor amount of project 101 for feb is $15,000 ($20,000 less $5000 of Jan Labor) and Project 102 for Feb is $15,000. We have added both the labor of project 101 and 102 and entered it in Labor a/c. There is no need to enter labor amount of different projects differently. It is enough to specify in narration.

Similarly office wage of Jan $500 is debited to outstanding labor a/c and remaining $1000 of feb office wage is debited to Office wage a/c.

And Salaries is an expense and debited to salaries a/c and the total of all the above amount is credited is cash a/c as all the expenses are paid.

Question 7 -  Progress Billing:

Particulars	Debit ($)	Credit ($)
Accounts Receivable a/c Dr	170,000
Retention Receivable a/c Dr	10,000
To Billing on Project 101		80,000
To Billing on Project 102		100,000

The Bills on Construction in progress is sent to the clients and the billing on the respective project is credited with the amount of the bill.

For Project 102 there is 10% Retention amount (i.e) $100,000*10% = $10,000. so this $10,000 has been debited to Retention receivable a/c and balance $90,000 is debited to Accounts receivable. there is no such retention to Project 101 so the entire billing amount of $80,000 is debited to accounts receivable.  

So, Accounts receivable is debited with $90,000 + $80,000 = $170,000