ACTG 351 HW #1 Answers 1. Curtiss Construction Company, Inc. entered into a fixed-price contract with Axelrod Associates on July 1, 2011, to construct a four-story office building. At that time, Curtiss estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is $4,000,000. The building was completed on December 31, 2013. Accumulated contract costs incurred, estimated costs to complete the contract, accumulated billings to Axelrod and cash collections from Axelrod under the contract are as follows: 12/31/2011 $350,000 3,150,000 720,000 600,000 12/31/2012 $2,500,000 1,700,000 2,170,000 1,800,000 12/31/2013 $4,250,000 0 3,600,000 3,600,000
Costs incurred to…show more content…
Record the necessary journal entries for each year (credit Various Accounts for construction costs incurred).
2011 2012 -200,000 2013 4,000,000 4,050,000 -50,000
Revenue Expense Gross Profit
All the journal entries remain the same except for entry 2). 2012 Entry: Loss on Long-term Contracts CIP (loss) 2013 Entry: Construction Expense CIP (loss) Revenue
4,050,000 50,000 4,000,000
2. Bounce Computer Corp allows customers to pay in installments for their products. Bounce only had two installment contracts outstanding during 2011. Each contract has a total contract price of $1,000,000 but is payable in five equal annual installments. Both contracts started in the same year. One contract is accounted for using the installment sales method, the other is accounted using the cost recovery method. Both contracts record the same amount of gross profit and have the same gross profit percentage in 2011. a. Assume 2011 is the 3rd year of both contracts, how much gross profit is recorded on each contract this year? If gross profit is equal for two methods, it must be the 1st year of recording GP under Cost Recovery. Cost Recovery: Total Cash Received = 600,000 = 200,000*3 periods Gross Profit Recorded = 600,000 – 1,000,000(1-GP) Under Installment: Gross Profit Recorded = 200,000*GP Therefore: 200,000*GP = 600,000 – 1,000,000(1-GP) 400,000 = 800,000GP GP = .50 Gross profit recorded for each