Concept explainers
Requirement – 1
International Financial Reporting Standards
They are commonly known as IFRS. These are set of accounting standards which are developed by independent (Non-profit) organization called as International Accounting Standards Board (IASB). These are universally accepted set of standards which state the rules and standards for accounting at global level.
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 as revenue minus cost of completion until date.
If a contract does not meet the performance obligation norm, then the seller cannot recognize the revenue till the project is 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.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
To determine: The amount of gross profit or loss to be recognized in 2018, 2019, and 2020.
Requirement – 1
Explanation of Solution
Here,
2018 gross profit recognized is $0
2019 gross profit recognized is $0
2020 gross profit recognized is $1,800,000
Now, calculate the total gross profit:
Hence, the calculated total gross profit is $1,800,000.
Requirement – 2
To prepare: The
Requirement – 2
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 (1)
- 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 |
$2,000,000 | ||||
Billings on construction contract | $2,000,000 | |||
(To record progress billings) |
Table (2)
- Account receivable is an asset. There is an increase in asset value. Therefore, it is debited.
- Billings on construction contract is revenue. There is an increase in revenue value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $1,800,000 | |||
Account receivable | $1,800,000 | |||
(To record cash collection) |
Table (3)
- 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 |
Cost of construction | $2,400,000 | |||
Revenue from long-term contracts | $2,400,000 | |||
(To record gross profit) |
Table (4)
- Cost of construction is an expense. There is a decrease in stockholders’ equity value. Therefore, it is debited.
- Revenue from long-term contracts is revenue. There is an increase in stockholders’ equity 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 stockholders’ equity 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 an increase in stockholders’ equity value. Therefore, it is credited.
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.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cost of construction | $3,600,000 | |||
Revenue from long-term contracts | $3,600,000 | |||
(To record gross profit) |
Table (8)
- 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 stockholders’ equity 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 (9)
- 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 stockholders’ equity 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 (10)
- 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
stockholders equity value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $4,600,000 | |||
Account receivable | $4,600,000 | |||
(To record cash collection) |
Table (11)
- 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 | $2,400,000 | |||
Revenue from long-term contracts | $4,000,000 | |||
(To record gross profit) |
Table (12)
- 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 stockholders’ equity value. Therefore, it is credited.
Requirement – 3
To prepare: The partial balance sheet for 2018 and 2019.
Requirement – 3
Explanation of Solution
Partial balance sheet of W Construction Company is as follows:
In the year 2018:
Assets | 2018 | |
Account receivables | $400,000 | |
Construction in progress | $2,400,000 | |
Less: Billings | ($2,000,000) | |
Costs in excess of billings | $400,000 |
Table (13)
In the year 2019:
Assets | 2019 | |
Account receivables | $600,000 | |
Construction in progress | $6,000,000 | |
Less: Billings | ($6,000,000) | |
Costs in excess of billings | $0 |
Table (14)
Requirement – 4
The total amount of gross profit or loss to be recognized in 2018, 2019, and 2020.
Requirement – 4
Explanation of Solution
Here,
2018 gross profit recognized is $0
2019 gross profit recognized is $0
2020 gross profit recognized is $600,000
Now, calculate the total gross profit:
Hence, the calculated total gross profit is $600,000.
Note:
Details for cost incurred and estimated cost to complete.
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 |
Table (15)
Requirement – 5
The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020.
Requirement – 5
Explanation of Solution
Here,
2018 gross profit recognized is $0
2019 gross profit recognized is ($300,000)
2020 gross profit recognized is $200,000
Now, calculate the total gross profit:
Hence, the calculated total gross profit is ($100,000).
Note:
Details for cost incurred and estimated cost to complete.
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 |
Table (16)
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Chapter 5 Solutions
SPICELAND GEN CMB LL INTRM ACCTG; CNCT
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