Percentage of Completion Method
Solutions to the long-term contracts in-class questions
Practice Question #2
Percentage of completion method a. 2013 2014 2015 2016 Construction costs Incurred to date $ 300,000 $ 1,400,000 $2,263,000 $3,100,000 Estimated costs to complete 2,200,000 1,400,000 837,000 — Total estimated costs $2,500,000 $ 2,800,000 $3,100,000 $3,100,000 Percent (%) completed 12% 50% 73% 100% Revenue to date $ 360,000 $ 1,500,000 $ 2,190,000 $3,000,000 Revenue recognized —current $ 360,000 $ 1,140,000 $ 690,000 $ 810,000b Construction expense —current (300,000) (1,100,000) (890,000)a (810,000) Gross profit (loss) $ 60,000 $ 40,000 $ (200,000) $ 0
aIn 2015, a negative gross profit (loss) of $100,000 is expected on the entire contract. This must be recognized in 2015 along with eliminating the $100,000 in gross profit recognized so far. Therefore, the total expense to be recognized in 2015 is $890,000 ($690,000 + $100,000 + $100,000). The journal entry to record the revenue and expense would be:
Construction Expense 890,000 Construction in Progress 100,000 Construction Revenue 690,000 Provision for Loss on Contract 100,000
bIn 2016, no gross profit or loss will be recognized because the $837,000 actual costs were equal to the remaining costs estimated in 2015. Since total revenues cannot exceed $3,000,000, 2016 revenues (and costs) must be $810,000.
b. Completed contract method:
Income Statements
2013 2014 2015 2016 Gross profit (loss) $0 $0 $(100,000) $0
Note: Under the completed-contract method, no profit is recognized until the contract is complete. However, if a negative gross profit (loss) is expected, it must be recognized immediately.
Practice question #3
1. 2013 2014 2015 Construction costs incurred to date $ 150,000 $ 392,000 $ 560,000 Estimated costs to complete 350,000 168,000 — Total estimated costs $ 500,000
Practice Question #2
Percentage of completion method a. 2013 2014 2015 2016 Construction costs Incurred to date $ 300,000 $ 1,400,000 $2,263,000 $3,100,000 Estimated costs to complete 2,200,000 1,400,000 837,000 — Total estimated costs $2,500,000 $ 2,800,000 $3,100,000 $3,100,000 Percent (%) completed 12% 50% 73% 100% Revenue to date $ 360,000 $ 1,500,000 $ 2,190,000 $3,000,000 Revenue recognized —current $ 360,000 $ 1,140,000 $ 690,000 $ 810,000b Construction expense —current (300,000) (1,100,000) (890,000)a (810,000) Gross profit (loss) $ 60,000 $ 40,000 $ (200,000) $ 0
aIn 2015, a negative gross profit (loss) of $100,000 is expected on the entire contract. This must be recognized in 2015 along with eliminating the $100,000 in gross profit recognized so far. Therefore, the total expense to be recognized in 2015 is $890,000 ($690,000 + $100,000 + $100,000). The journal entry to record the revenue and expense would be:
Construction Expense 890,000 Construction in Progress 100,000 Construction Revenue 690,000 Provision for Loss on Contract 100,000
bIn 2016, no gross profit or loss will be recognized because the $837,000 actual costs were equal to the remaining costs estimated in 2015. Since total revenues cannot exceed $3,000,000, 2016 revenues (and costs) must be $810,000.
b. Completed contract method:
Income Statements
2013 2014 2015 2016 Gross profit (loss) $0 $0 $(100,000) $0
Note: Under the completed-contract method, no profit is recognized until the contract is complete. However, if a negative gross profit (loss) is expected, it must be recognized immediately.
Practice question #3
1. 2013 2014 2015 Construction costs incurred to date $ 150,000 $ 392,000 $ 560,000 Estimated costs to complete 350,000 168,000 — Total estimated costs $ 500,000