PDA

View Full Version : Percentage of completion and completed contract method


carter522
Apr 12, 2010, 01:55 PM
Instructions:
The Cloudy Sky Construction Company specializes in large construction projects. In year 1, it entered into a 3 year construction project to build a slow curing bridge foundation at a total price of $6,375,000. At the conclusion of the project, the following information was compiled.

Year 1 Year 2 Year 3
Collections to date $1,147,500 $3,442,500 $6,056,250
Billings to date 1,275,000 3,825,000 6,375,000
Costs incurred to date 1,550,000 4,125,000 4,675,000
Estimated costs to complete as of the end of each year 2,500,000 725,000 0

Instructions:

(1) Assuming that Cloudy Sky uses the percentage-of-completion method, compute the amount of gross profit to be recognized each year.

(2) Prepare all necessary journal entries for each year under the percentage-of-completion method. Assume that all billings were paid in the year billed except for year 3, and that all costs were paid in cash. You may omit explanations.

(3) Assuming the use of the completed-contract method, compute the amount of gross profit to be recognized each year.

(4) Prepare all necessary journal entries for each year under the completed-contract method. Assume that all billings were paid in the year billed except for year 3, and that all costs were paid in cash. You may omit explanations.

Here is what I have so far, I am just stuck and I am not understanding what I need to do next, nor am I sure that #1 and #2 are actually correct, this is my first time doing this. Please help



(1) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.

Gross profit recognized in:

YEAR 1 YEAR 2 YEAR 3
Contract price $6,375,000 $6,375,000 $6,375,000
Costs:
Costs to date $1,550,000 $3,825,000 $6,375,000
Estimated costs to complete 2,500,000 4,050,000 725,000 4,550,000 0 6,375,000
Total estimated profit 2,325,000 1,825,000 0
Percentage completed to date 38% 84% 100%
Total gross profit recognized 883,500 1,533,000 0
Less: GP recognized in previous years 0 883,500 1,533,000
Gross profit recognized in current year $883,500 $649,500 ($1,533,000)




(2) Prepare all necessary journal entries for each year under the percentage-of-completion method. Assume that all billings were paid in the year billed except for year 3, and that all cost
Were paid in cash.
Construction in process 1,550,000
Materials, Cash, Payables, etc. 1,550,000

Accounts Receivable 1,275
billings on construction in process 1,275

Cash 1,147,500
Accounts receivable 1,147,500

Construction expenses 1,550
Construction in process 883,500
Revenue from long-term contract 885,050


(3) Assuming the use of the completed-contract method, compute the amount of gross profit to be recognized each year.



(4) Prepare all necessary journal entries for each year under the completed contract method. Assume that all billings were paid in the year billed except for year 3, and that all cost were
Paid in cash.

rehmanvohra
Apr 12, 2010, 11:41 PM
Under percentage of completion method, follow these steps:

For each individual year calculate estimated profit as follows:

Contract price xxxx
Less: Total estimated costs
Costs incurred to date xxxx
Further estimated costs xxx
Estimated profit xxx

Profit to be recognized is computed:
1. Compute percentage of completion by dividing costs incurred with total estimated costs
2. Use this rate to compute the gross profit. In the second and third year you will reduce the gross profit recognized in the previous years.


(1) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.

Gross profit recognized in:

YEAR 1 YEAR 2 YEAR 3
Contract price $6,375,000 $6,375,000 $6,375,000
Costs:
Costs to date $1,550,000 $3,825,000 $6,375,000
Estimated costs to complete 2,500,000 4,050,000 725,000 4,550,000 0 6,375,000
Total estimated profit 2,325,000 1,825,000 0
Percentage completed to date 38% 84% 100%
Total gross profit recognized 883,500 1,533,000 0
Less: GP recognized in previous years 0 883,500 1,533,000
Gross profit recognized in current year $883,500 $649,500 ($1,533,000)

I think you need to rework this part. Where did you get SIX figures for the estimated costs to complete? These should be three only. Secondly how did you get 84% for the second year?