PART I MULTIPLE CHOICE QUESTIONS
Use the following information for questions 1-4:
Seasons Construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is $14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2014.
1. At December 31, 2014, Seasons estimates that it is 30% complete with the construction, based on costs incurred. What is the total amount of Revenue from Long-Term Contracts recognized for 2014 and what is the balance in the Accounts Receivable account assuming Cannon Cafe has not yet made its last quarterly payment? Revenue
B. $4,260,000 $1,240,000
Total revenue: 14,880,000 x 30%=4464000;
AR: the amount billed but not yet collected in the last quarter: 1240,000
2. At December 31, 2015, Seasons Construction estimates that it is 75% complete with the building; however, the estimate of total costs to be incurred has risen to $14,400,000 due to unanticipated price increases. What is the total amount of Construction Expenses that Seasons will recognize for the year ended December 31, 2015? A. $10,800,000
Total cost incurred so far: 14,400,000* 75%=10800000
Cost incurred in 2014: 14,200,000*30%=4260000
Cost incurred in 2015: 10800000-4260000=6540000
3. At December 31, 2015, Seasons Construction estimates that it is 75% complete with the building; however, the estimate of total costs to be incurred has risen to $14,400,000 due to unanticipated price increases. What is reported in the balance sheet at December 31, 2015 for Seasons as the difference between the Construction in Process and the Billings on Construction in Process accounts, and is it a debit or a credit? Difference between the accounts
Construction in process balance: (cost and profit recognized so far) 14880000*75%=11160000
Billing account balance: 1240,000 x 4 quarters x 2 years=9920000
Difference between the two accounts: 11160000-9920000=1240000 (debit)
4. Seasons Construction completes the remaining 25% of the building construction on December 31, 2016, as scheduled. At that time the total costs of construction are $15,000,000. What is the total amount of Revenue from Long-Term Contracts and Construction Expenses that Seasons will recognize for the year ended December 31, 2016? Revenue
Revenue for 2016: total revenue – revenue recognized so far = 14880000-11160000 =3720000 Construction expense for 2016: total expense – expenses recognized so far=1500000-75%x14400000=4200000 Use the following information for questions 5 and 6.
Gomez, Inc. began work in 2014 on contract #3814, which provided for a contract price of $14,400,000. Other details follow: 2014
Costs incurred during the year
Estimated costs to complete, as of December 31
Billings during the year
Collections during the year
5. Assume that Gomez uses the percentage-of-completion method of accounting. The portion of the total gross profit to be recognized as income in 2014 is A. $900,000.
Total estimated gross profit = 14400000-2400000-7200000 =4800000
% of completion: 2400000/(2400000+7200000)=25%
Recognizable Gross profit 25%x4800000=1200000
6. Assume that Gomez uses the completed-contract method of...
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