Long-term contract; revenue recognition upon completion
• LO5–9
[This is a variation of P 5–10 modified to focus on revenue recognition upon project completion.]
Required:
Complete the requirements of P 5–10 assuming that Westgate Construction’s contract with Santa Clara County does not qualify for revenue recognition over time.
Requirement – 1
Contract
Contract is a written document that creates legal enforcement for buying and selling the property. It is committed by the parties to performing their obligation and enforcing their rights.
Revenue recognized point of long term contract
A long-term contract qualifies for revenue recognition over time. The seller can recognize the revenue as per percentage of the completion of the project, which is recognized by revenue mines cost of completion until date.
A contract does not meet the performance obligation norm. The seller cannot recognize the revenue till the project complete.
The revenue recognition principle
The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.
To describe: The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020.
Explanation of Solution
The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020 are as follows:
Year | Revenue recognized | Gross profit (loss) |
2018 | $0 | $0 |
2019 | $0 | $0 |
2020 | $10,000,000 | $1,800,000 |
Total | $10,000,000 | $1,800,000 |
Table (1)
Therefore, the amount of revenue in the year 2018, 2019, and 2020 is $0, $0, and $10,000,000 respectively, and gross profit in the year 2018, 2019, and 2020 is $0, $0, and $1,800,000 respectively.
Requirement – 2
To prepare: The journal entries for the year 2018, 2019 and 2020.
Explanation of Solution
In the year 2018:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Construction in progress | $2,400,000 | |||
Various accounts | $2,400,000 | |||
(To record construction cost) |
Table (2)
- Construction in progress is an asset. There is an increase in asset value. Therefore, it is debited.
- Various accounts are revenue. There is an increase in liability value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Account receivable | $2,000,000 | |||
Billings on construction contract | $2,000,000 | |||
(To record progress billings) |
Table (3)
- Account receivable is an asset. There is an increase in asset value. Therefore, it is debited.
- Billings on construction contract is revenue. There is a decrease in liability value. Therefore, it is debited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $1,800,000 | |||
Account receivable | $1,800,000 | |||
(To record cash collection) |
Table (4)
- Cash is an asset. There is an increase in asset value. Therefore, it is debited.
- Account receivable is an asset. There is a decrease in asset value. Therefore, it is credited.
In the year 2019:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Construction in progress | $3,600,000 | |||
Various accounts | $3,600,000 | |||
(To record construction cost) |
Table (5)
- Construction in progress is an asset. There is an increase in asset value. Therefore, it is debited.
- Various accounts are revenue. There is an increase in liability value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Account receivable | $4,000,000 | |||
Billings on construction contract | $4,000,000 | |||
(To record progress billings) |
Table (6)
- Account receivable is an asset. There is an increase in asset value. Therefore, it is debited.
- Billings on construction contract is revenue. There is a decrease in liability value. Therefore, it is debited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $3,600,000 | |||
Account receivable | $3,600,000 | |||
(To record cash collection) |
Table (7)
- Cash is an asset. There is an increase in asset value. Therefore, it is debited.
- Account receivable is an asset. There is a decrease in asset value. Therefore, it is credited.
In the year 2020:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Construction in progress | $2,200,000 | |||
Various accounts | $2,200,000 | |||
(To record construction cost) |
Table (8)
- Construction in progress is an asset. There is an increase in asset value. Therefore, it is debited.
- Various accounts are revenue. There is an increase in liability value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Account receivable | $4,000,000 | |||
Billings on construction contract | $4,000,000 | |||
(To record progress billings) |
Table (9)
- Account receivable is an asset. There is an increase in asset value. Therefore, it is debited.
- Billings on construction contract is revenue. There is a decrease in liability value. Therefore, it is debited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $4,600,000 | |||
Account receivable | $4,600,000 | |||
(To record cash collection) |
Table (10)
- Cash is an asset. There is an increase in asset value. Therefore, it is debited.
- Account receivable is an asset. There is a decrease in asset value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Construction in progress | $1,800,000 | |||
Cost of construction | $8,200,000 | |||
Revenue from long-term contracts | $10,000,000 | |||
(To record gross profit) |
Table (11)
- Construction in progress is an asset. There is an increase in asset value. Therefore, it is debited.
- Cost of construction is an expense. There is a decrease in liability value. Therefore, it is debited.
- Revenue from long-term contracts is revenue. There is an increase in liability value. Therefore, it is credited.
Requirement – 3
To prepare: The partial balance sheet for 2018 and 2019.
Explanation of Solution
Partial balance sheet of W Construction Company is as follows:
In the year 2018:
Assets | 2018 | |
Account receivables | $200,000 | |
Construction in progress | $2,400,000 | |
Less: Billings | ($2,000,000) | |
Costs in excess of billings | $400,000 |
Table (12)
In the year 2019:
Assets | 2019 | |
Account receivables | $600,000 | |
Construction in progress | $7,500,000 | |
Less: Billings | ($6,000,000) | |
Costs in excess of billings | $1,500,000 |
Table (13)
Requirement – 4
Explanation of Solution
Given,
Particulars | 2018 | 2019 | 2020 |
Costs incurred during the year | $2,400,000 | $3,800,000 | $3,200,000 |
Estimated costs to complete as of year-end | $5,600,000 | $3,100,000 |
The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020 are as follows: (refer Requirement 3)
Year | Revenue recognized | Gross profit (loss) |
2018 | $0 | $0 |
2019 | $0 | $0 |
2020 | $10,000,000 | $600,000 |
Total | $10,000,000 | $600,000 |
Table (14)
Therefore, the amount of revenue in the year 2018, 2019, and 2020 is $0, $0, and $10,000,000 respectively, and gross profit in the year 2018, 2019, and 2020 is $0, $0, and $600,000 respectively.
Requirement – 5
Explanation of Solution
Given,
Particulars | 2018 | 2019 | 2020 |
Costs incurred during the year | $2,400,000 | $3,800,000 | $3,900,000 |
Estimated costs to complete as of year-end | $5,600,000 | $4,100,000 |
The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020 are as follows:
Year | Revenue recognized | Gross profit (loss) |
2018 | $0 | $0 |
2019 | $0 | ($300,000) |
2020 | $10,000,000 | $200,000 |
Total | $10,000,000 | ($100,000) |
Table (15)
Therefore, the amount of revenue in the year 2018, 2019, and 2020 is $0, $0, and $10,000,000 respectively, and gross profit in the year 2018, 2019, and 2020 is $0, ($300,000), and $200,000 respectively.
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