Chapter 17, Problem 10P

1.

To determine

Compute the total estimated gross profit on the contracts.

Explanation of Solution

Contract:

Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be written, oral or implied by ordinary business practices.

Calculate the total estimated gross profit:

	As of December 31
	2019	2020	2021
Contract Price	$20,000,000	$20,000,000	$20,000,000
Costs incurred to date	$8,000,000	$16,000,000	$18,000,000
Estimated costs to complete	$6,000,000	$3,000,000	$0
Total costs estimated to date $\left(\begin{array}{l}\text{Contract}\text{price}-\\ \text{Estimated}\text{costs}\text{to}\text{complete}\end{array}\right)$	$14,000,000	$19,000,000	$18,000,000
Estimated gross profit	$6,000,000	$1,000,000	$2,000,000

Table (1)

2.

To determine

Compute the percentage of completion for 2019, 2020 and 2021.

Explanation of Solution

Compute the percentage of completion for 2019:

$\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\\ \text{completion}\text{for}\text{2019}\end{array}\}\text{=}\frac{\text{Costs}\text{incurred}\text{to}\text{date}}{\text{Cost}\text{incurred}\text{to}\text{date}\text{+}\text{Estimated}\text{costs}\text{to}\text{complete}}\\ \text{=}\frac{\text{\$8,000,000}}{\text{\$8,000,000}\text{+}\text{\$6,000,000}}\\ \text{=}\frac{\text{\$8,000,000}}{\text{\$14,000,000}}\text{×100}\\ \text{=}\text{57}\text{.1\%}\end{array}$

Therefore, the percentage of completion for 2019 is 57.1%.

Compute the percentage of completion for 2020:

$\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\\ \text{completion}\text{for}\text{2020}\end{array}\}\text{=}\frac{\text{Costs}\text{incurred}\text{to}\text{date}}{\text{Cost}\text{incurred}\text{to}\text{date}\text{+}\text{Estimated}\text{costs}\text{to}\text{complete}}\\ \text{=}\frac{\text{\$16,000,000}}{\text{\$16,000,000}\text{+}\text{\$3,000,000}}\\ \text{=}\frac{\text{\$16,000,000}}{\text{\$19,000,000}}\text{×100}\\ \text{=}84.2\text{\%}\end{array}$

Therefore, the percentage of completion for 2020 is 84.2%.

Compute the percentage of completion for 2021:

$\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\\ \text{completion}\text{for}\text{2021}\end{array}\}\text{=}\frac{\text{Costs}\text{incurred}\text{to}\text{date}}{\text{Cost}\text{incurred}\text{to}\text{date}\text{+}\text{Estimated}\text{costs}\text{to}\text{complete}}\\ \text{=}\frac{\text{\$18,000,000}}{\text{\$18,000,000}\text{+}\text{\$0}}\\ \text{=}\frac{\text{\$18,000,000}}{\text{\$18,000,000}}\text{×100}\\ \text{=}100\text{\%}\end{array}$

Therefore, the percentage of completion for 2021 is 100%.

3.

To determine

Compute the percentage of completion for 2019, 2020 and 2021.

Explanation of Solution

Compute the amount of income recognized for 2019:

$\begin{array}{c}\begin{array}{l}\text{Income}\text{recognized}\\ \text{during}\text{2019}\end{array}\}\text{=}\text{Percent}\text{completed}\text{×}\text{Estimated}\text{gross}\text{profit}\\ \text{=}\text{57}\text{.1\%}\text{×}\text{\$6,000,000}\\ \text{=\$3,426,000}\end{array}$

Therefore, the amount of income recognized during 2019 is $3,426,000.

Compute the amount of income recognized for 2020:

$\begin{array}{c}\begin{array}{l}\text{Income}\text{recognized}\\ \text{during}\text{2020}\end{array}\}\text{=}\left[\begin{array}{l}\left(\text{Percent}\text{completed}\text{×}\text{Estimated}\text{gross}\text{profit}\right)\\ -\left(\text{Income}\text{recognized}\text{during}\text{2019}\right)\end{array}\right]\\ \text{=}\left[\left(\text{84}\text{.2\%}\text{×}\text{\$1,000,000}\right)-\text{\$3,426,000}\right]\\ \text{=(\$2,584,000)}\end{array}$

Therefore, the amount of income recognized during 2020 is ($2,584,000).

Compute the amount of income recognized for 2021:

$\begin{array}{c}\begin{array}{l}\text{Income}\text{recognized}\\ \text{during}\text{2021}\end{array}\}\text{=}\left[\begin{array}{l}\left(\text{Percent}\text{completed}\text{×}\text{Estimated}\text{gross}\text{profit}\right)\\ -\left(\text{Income}\text{recognized}\text{during}\text{2019}\text{+ Income}\text{recognized}\text{during}\text{2020}\right)\end{array}\right]\\ \text{=}\left[\begin{array}{l}\left(\text{100\%}\text{×}\text{\$2,000,000}\right)-\\ \left(\text{\$3,426,000+}\text{ \$2,584,000}\right)\end{array}\right]\\ \text{= \$1,158,000}\end{array}$

Therefore, the amount of income recognized during 2021 is $1,158,000.

4.

To determine

Journalize entries related to the project for 3 years.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare journal entries:

Date	Account titles and explanation	Debit ($)	Credit ($)
2019	Construction in progress (inventory)	8,000,000
	Accounts payable, cash, salaries, payables etc.		8,000,000
	(To record costs of construction)
	Construction expense	8,000,000
	Construction in progress (Refer to requirement 3)	3,426,000
	Construction revenue $(\$8,000,000-\$3,426,000)$		11,426,000
	(To record gross profit)
	Accounts receivable	8,000,000
	Partial billings		8,000,000
	To record partial billings)
	Cash	6,000,000
	Accounts receivable		6,000,000
	(To record collections)
2020	Construction in progress (inventory)	8,000,000
	Accounts payable, cash, salaries, payables etc.		8,000,000
	(To record costs of construction)
	Construction expense	8,000,000
	Construction in progress (Refer to requirement 3)		2,584,000
	Construction revenue $(\$8,000,000-\$2,584,000)$		5,416,000
	(To record gross profit)
	Accounts receivable	8,000,000
	Partial billings		8,000,000
	To record partial billings)
	Cash	6,000,000
	Accounts receivable		6,000,000
	(To record collections)
2021	Construction in progress (inventory)	2,000,000
	Accounts payable, cash, salaries, payables etc.		2,000,000
	(To record costs of construction)
	Construction expense	2,000,000
	Construction in progress (Refer to requirement 3)	1,158,000
	Construction revenue $(\$2,000,000-\$1,158,000)$		3,158,000
	(To record gross profit)
	Accounts receivable	4,000,000
	Partial billings		4,000,000
	To record partial billings)
	Cash	6,000,000
	Accounts receivable		6,000,000
	(To record collections)
	Partial billings	20,000,000
	Construction in progress		20,000,000
	(To record and to close partial billings)

Table (2)

5.

To determine

Explain the manner in which the project will be carried on the balance sheet for 2019, 2020 and 2021.

Explanation of Solution

The manner in which the project is carried on the balance sheet for the year 2019, 2020 and 2021 is explained below:

	As of December 31,
Current assets	2019	2020	2021
Accounts receivable	$2,000,000	$4,000,000	$2,000,000
Construction in progress	$11,426,000	$16,842,000
Less: Partial billings	$8,000,000	$16,000,000
Construction in progress in excess of billings	$3,426,000	$842,000

Table (3)