Percentage of completion and completed contract method
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.
