Professional Documents
Culture Documents
Long-Term Construction Contracts
Long-Term Construction Contracts
LESSON 10
LONG-TERM CONSTRUCTION CONTRACTS
I. THEORETICAL FRAMEWORK
CONCEPT MAP
struction Contract – a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their desig
is defined as
CONTRACT REVENUE
Construction Revenue – the total amount of consideration receivable under the contract (par. 12)
is defined as
Variation – an instruction by the customer for a change in the scope of the work to be performed under the contract (par
56
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
Illustrative Problem
The STRATIFIED CONSTRUCTION COMPANY has a 3-year contract to construct a bridge. The contract price is P7,000,000. The following
data pertain to the construction period.
2012 2013 2014
Cost to date 1,890,00 5,040,00 5,670,000
0 0
Estimated cost to complete 4,410,00 560,000 ---
0
Progress billings each year 2,800,00 2,800,00 1,400,000
0 0
Collections of billings each 2,450,00 2,800,00 1,750,000
year 0 0
Required:
1. Prepare journal entries each year. Show supporting computations for year-end entries. Present the difference between
percentage of completion method and zero-profit method.
2. Calculate balance of construction-in-progress account at the end of each year before closing.
3. Calculate revenue recognized thru end of each year and compare with the CIP balances calculated in Item 2 above.
Solution:
PERCENTAGE OF COMPLETION METHOD
2012 Journal Entries:
(2012 Day-to-Day Entries)
Construction in Progress 1,890,00
Incurred 0 See NOTE
Costs Miscellaneous Accounts 1,890,00 1
0
Accounts Receivable 2,800,00
0 See NOTE
Billings
Progress Billings 2,800,00 2
0
Cash 2,450,00
0 See NOTE
Collections
Accounts Receivable 2,450,00 3
0
(2012 Year-End Entry)
Construction in Progress 210,000
Income &
Construction Costs 1,890,00 See NOTE
Expense
0 4
Recognitio
Construction Revenue 2,100,00 and SCI
n
0
NOTE 1
The Construction in Progress (CIP) account represents the value of our work. It consists of (1) construction costs and (2) gross profit.
Note that “costs” recorded in CIP refers to “incurred costs”, that is, the costs that are actually incurred during the current year. It should
be differentiated with “cumulative costs” or “costs to date” which refer to the total actual costs accumulated since the inception of the
contract. What is recognized as “costs” in CIP refers to “incurred costs”.
NOTE 2
57
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
Progress Billings (PB) is also known as Contract Billings. This is the amount that we bill to our customers in exchange for our work. If
CIP>PB, it means that we have worked so much but our billings is so low. If CIP<PB, it means that we have worked less but we billed so
much to the customers. In summary:
CIP > PB Current Asset Receivable to Customer; Due from
Customer
CIP < PB Current Liability Payable to Customer; Due to Customer
NOTE 3
This refers to the collections made to our previous billings. Cash collections have no effect neither on our percentage of completion nor in
the statement of comprehensive income.
NOTE 4
The entries are derived from the computation in the Statement of Comprehensive Income. See Statement of Comprehensive Income. Also
note that only the “This Year” column is considered in the journal entry.
58
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
The entries are derived from the computation in the Statement of Comprehensive Income. See Statement of Comprehensive Income. Also
note that only the “This Year” column is considered in the journal entry.
Computation for Percentage of Completion Rate
Contract Price 7,000,000
Costs to Date 5,040,000
Estimated Costs to Complete 560,000
Estimated Total Costs 5,600,000
Estimated Total Gross Profit 1,400,000
Percentage of Completion Rate = Costs to Date / Estimated Total Costs
Percentage of Completion Rate = 5,040,000 / 5,600,000
Percentage of Completion Rate = 90%
Note that if the question asks for the “percentage of completion as of the year 2013”, the answer is 90% because the question
refers to the cumulative percentage of completion since the inception of the contract. If however, the question asks for the “ percentage of
completion during the year 2013”, the answer is 60% (90% - 30%) because the question refers to the percentage of completion for 2013
only. The 90% completion rate includes the 30% completion rate we solved in 2012.
Also note that there is a difference between the questions “balance of CIP” and “balance of CIP in excess of PB”. If the question
asks for the balance of CIP, you should note if this is at year-end or at a specific day in the year. In this case, the balance of CIP at the end
of 2013 is 6,300,000. If the question asks for the balance of CIP in excess of PB, we should get the difference between CIP and PB. The
balance of PB is 5,600,000. Therefore, the balance of CIP in excess of PB is 700,000. See the T-Accounts below:
CIP PB
2012 Costs 1,890,00 2,800,00 2012 billings
0 0
2012 Profit __210,000 __________ __________ ___________
_ _
2012 Ending 2,100,00 2,800,00 2012 Ending balance
balance 0 0
2013 Costs 3,150,00 __________ 2,800,00 2013 billings
0 _ 0
2013 Profit 1,050,00 __________ 5,600,00 2013 Ending balance
0 _ 0
2013 Ending 6,300,00
balance 0
2014 Journal Entries:
(2014 Day-to-Day Entries)
Incurred Construction in Progress 630,000
Costs Miscellaneous Accounts 630,000
Accounts Receivable 1,400,00
0
Billings
Progress Billings 1,400,00
0
Cash 1,750,00
0
Collections
Accounts Receivable 1,750,00
0
(2014 Year-End Entries)
Income & Construction in Progress 70,000
See NOTE
Expense Construction Costs 630,000
8
Recognitio Construction Revenue 700,000 and SCI
n
Progress Billings 7,000,00
Closing 0 See NOTE
Entry Construction in Progress 7,000,00 9
0
NOTE 8
The entries are derived from the computation in the Statement of Comprehensive Income. See Statement of Comprehensive Income. Also
note that only the “This Year” column is considered in the journal entry.
Computation for Percentage of Completion Rate
Contract Price 7,000,000
Costs to Date 5,670,000
Estimated Costs to Complete __________0
Estimated Total Costs 5,670,000
Estimated Total Gross Profit 1,330,000
Percentage of Completion Rate = Costs to Date / Estimated Total Costs
Percentage of Completion Rate = 5,670,000 / 5,670,000
Percentage of Completion Rate = 100%
NOTE 9
59
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
Upon completion of the contract, it is necessary to close the CIP and PB account.
CIP PB
2012 Costs 1,890,00 2,800,00 2012 billings
0 0
2012 Profit __210,000 ___________ ___________ ___________
2012 Ending 2,100,00 2,800,00 2012 Ending balance
balance 0 0
2013 Costs 3,150,00 ___________ 2,800,00 2013 billings
0 0
2013 Profit 1,050,00 ___________ 5,600,00 2013 Ending balance
0 0
2013 Ending 6,300,00 ___________ 1,400,00 2014 billings
balance 0 0
2014 Costs 630,000 7,000,00 Balance
0
2014 Profit ___70,000 ___________ Closing 7,000,00 ___________
Entry 0
Balance 7,000,00 __________0 Ending balance
0
___________ 7,000,00 Closing
0 Entry
Ending balance __________0
2013
Construction Revenue (7,000,000 × 90%) 6,300,00 2,100,000 4,200,000
0
Construction Costs (5,600,000 × 90%) 5,040,00 1,890,000 3,150,000
0
Gross Profit (1,400,000 × 90%) 1,260,00 210,000 1,050,000
0
2014
Construction Revenue (7,000,000 × 7,000,00 6,300,000 700,000
100%) 0
Construction Costs (5,670,000 × 100%) 5,670,00 5,040,000 630,000
0
Gross Profit (1,330,000 × 100%) 1,330,00 1,260,000 70,000
0
SIDE DISCUSSION
[CHANGES THAT AFFECTS THE CONTRACT PRICE]
If there are increases in the contract price, the effect is treated in accordance with PAS 8, “Changes in Accounting Estimates” which states
that it should be treated currently and prospectively”. This simply means construction revenue will change in the statement of
comprehensive income but there will be no changes in the journal entries for the previous years. (PAS 11, par.38)
ZERO-PROFIT METHOD
2012 Journal Entries:
(2012 Day-to-Day Entries)
Construction in Progress 1,890,00
Incurred 0
Costs Miscellaneous Accounts 1,890,00
0
Accounts Receivable 2,800,00
0
Billings
Progress Billings 2,800,00
0
60
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
Cash 2,450,00
0
Collections
Accounts Receivable 2,450,00
0
(2012 Year-End Entry)
Construction Costs 1,890,00
Income &
0 See
Expense
Construction Revenue 1,890,00 SCI
Recognition
0
2013 Journal Entries:
(2013 Day-to-Day Entries)
Construction in Progress 3,150,00
Incurred 0
Costs Miscellaneous Accounts 3,150,00
0
Accounts Receivable 2,800,00
0
Billings
Progress Billings 2,800,00
0
Cash 2,800,00
0
Collections
Accounts Receivable 2,800,00
0
(2013 Year-End Entry)
Construction Costs 3,150,00
Income &
0 See
Expense
Construction Revenue 3,150,00 SCI
Recognition
0
2014 Journal Entries:
(2014 Day-to-Day Entries)
Incurred Construction in Progress 630,000
Costs Miscellaneous Accounts 630,000
Accounts Receivable 1,400,00
0
Billings
Progress Billings 1,400,00
0
Cash 1,750,00
0
Collections
Accounts Receivable 1,750,00
0
(2014 Year-End Entries)
Construction in Progress 1,330,00
Income &
0
Expense See
Construction Costs 630,000
Recognitio SCI
Construction Revenue 1,960,00
n
0
Progress Billings 7,000,00
Closing 0
Entry Construction in Progress 7,000,00
0
Statement of Comprehensive Income
STRATIFIED CONSTRUCTION COMPANY
Statement of Comprehensive Income
TO DATE PRIOR YEAR THIS YEAR
2012
Construction 1,890,00 --- 1,890,000
Revenue 0
Construction Costs 1,890,00 --- 1,890,000
0
Gross Profit __________0 --- __________0
2013
Construction 5,040,00 1,890,000 3,150,000
Revenue 0
Construction Costs 5,040,00 1,890,000 3,150,000
0
61
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
2014
Construction 7,000,00 5,040,000 1,960,000
Revenue 0
Construction Costs 5,670,00 5,040,000 630,000
0
Gross Profit 1,330,00 __________0 1,330,000
0
Illustrative Problem
On January 1, 2012, DIVERSIFIED CONSTRUCTION CORPORATION entered into a 3-year contract to build a dam. The required contract
price is 6,912,000 and the estimated cost is P4,915,200. The following cost data relate to the construction activities.
2013 2014 2015
Costs incurred each year 2,304,00 2,004,48 2,968,320
0 0
Estimated cost to complete 3,840,00 2,872,32 ---
0 0
Billings to customer each 2,419,20 2,188,80 2,304,000
year 0 0
Cash collected 2,304,00 2,073,60 2,534,400
0 0
Required:
1. Prepare journal entries each year. Show supporting computations for year-end entries. DIVERSIFIED uses cost-to-cost
percentage of completion method.
2. What will differ among the entries had the company adapted zero-profit method?
3. Assuming that the cost incurred in year 2014 was P2M and holding all else equal, how much will be the gross profit/(gross
loss) recognized in 2014?
Solution:
PERCENTAGE OF COMPLETION METHOD
2012 Journal Entries:
(2012 Day-to-Day Entries)
Construction in Progress 2,304,00
Incurred 0
Costs Miscellaneous Accounts 2,304,00
0
Accounts Receivable 2,419,20
0
Billings
Contract Billings 2,419,20
0
Cash 2,304,00
0
Collections
Accounts Receivable 2,304,00
0
(2012 Year-End Entry)
Construction in Progress 288,000
Income &
Construction Costs 2,304,00 See NOTE
Expense
0 1
Recognitio
Construction Revenue 2,592,00 and SCI
n
0
NOTE 1
Computation for Percentage of Completion Rate
Contract Price 6,912,000
Costs to Date 2,304,000
Estimated Costs to Complete 3,840,000
62
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
63
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
2013
Construction Revenue (to balance) 4,039,680 2,592,000 1,447,680
Construction Costs (7,180,800 × 60%) 4,308,480 2,304,000 2,004,480
Gross Profit (Loss) (recognize immediately and in (268,800) 288,000 (556,800)
full!)
2014
Construction Revenue (to balance) 6,912,000 4,039,680 2,872,320
Construction Costs (7,276,800 × 100%) 7,276,800 4,308,480 2,968,320
Gross Profit (Loss) (recognize immediately and in (364,800) (268,800) (96,000)
full!)
ZERO-PROFIT METHOD
2012 Journal Entries:
(2012 Day-to-Day Entries)
Incurred Construction in Progress 2,304,00
Costs 0
64
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
65
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
2013
Construction Revenue (to balance) 4,039,680 2,304,000 1,735,680
Construction Costs 4,308,480 2,304,000 2,004,480
Gross Profit (Loss) (recognize immediately and in (268,800) __________0 (268,800)
full!)
2014
Construction Revenue (to balance) 6,912,000 6,912,000 2,872,320
Construction Costs 7,276,800 7,180,800 2,968,320
Gross Profit (Loss) (recognize immediately and in (364,800) (268,800) (96,000)
full!)
Practice Problem #1
In 2014, GREATWALL CORPORATION began construction work under a 3-year contract. The contract price was P2,400,000. GREATWALL uses the percentage of completion method
for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial
statement presentations relating to this contract at December 31, 2014, follows:
Balance Sheet
Accounts Receivable – Construction Contracts 51,600
Construction in Progress 156,000
Less Contract Billings 147,600
Cost of uncompleted contract in excess of 8,400
billings
Income Statement
Gross profit on the contract recognized in 2014 46,800
Required:
1. How much cash was collected in 2014 on this contract?
2. What was the initial estimated total income before tax on this contract in 2014?
3. How much was the actual cost incurred in 2014?
4. How much was the total cost of the project estimated at the end of 2014?
5. Prepare all the necessary journal entries for 2014.
Solution:
Requirement #1: Cash collections = 96,000
Billings is what composes the accounts receivables. Therefore, deductions in accounts receivables represent collections.
Contract billings 147,600
Less: Accounts receivables – 51,600
12/31/2014
Cash collections 96,000
Requirement #2: Total income before tax = 720,000 | Requirement #3: Actual cost incurred = 109,200 | Requirement #4: Total cost = 1,680,000
Contract Price 2,400,000
Costs to date (6.5%) 109,200 See NOTE
66
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
3
Estimated costs to complete 1,570,80
(93.5%) 0
Estimated Total Costs (100%) 1,680,000
Estimated Total Gross Profit 720,000
Multiply by Rate of Completion* _____6.5% See NOTE
2
Gross Profit – TO DATE 46,800
Less: Gross Profit – PRIOR YEAR __________0 See NOTE
1
Gross Profit – THIS YEAR 46,800
Practice Problem #2
STRONG CONSTRUCTIONS uses the percentage of completion method in recognizing income. In 2013, STRONG was engaged by SM on a fixed-price-contract to build a 3-storey
shopping mall. On January 1, 2015, a fire damaged the accounting records of STRONG CONSTRUCTIONS. The president of the company has contracted you to reconstruct the contract
information. The following data were taken from the salvaged files:
December 31
2013 2014
Architect’s estimated total cost of 7,500,00 8,000,000
completion 0
Percentage of completion 60%
Income recognized to date 500,000 1,200,000
Required: Compute for the percentage completed in 2013 on the SM Shopping Mall.
Solution:
ANSWER: 20%
2013 2014
Contract Price 10,000,00 10,000,000
0
Costs to Date 1,500,000 4,800,000
Estimated Costs to Complete 6,000,000 3,200,000
Estimated Total Costs 7,500,000 8,000,000
Estimated Total Gross Profit 2,500,000 2,000,000
Multiply by Rate of Completion _______20% _______60%
Gross Profit – TO DATE 500,000 1,200,000
Less: Gross Profit – PRIOR ___________0 500,000
YEAR
Gross Profit – THIS YEAR 500,000 700,000
Practice Problem #3
On January 2, 2014, QUICKBUILD ERECTORS entered into contract to construct two projects. The following data relate to the construction activities.
Project A Project B
Contract price 945,000 675,000
Cost incurred during 2014 540,000 630,000
Estimated costs to complete 270,000 157,500
Billings to customer 337,500 607,500
Required: What amount of gross profit should QUICKBUILD ERECTORS report in its 2014 income statement under PCM and ZPM?
Solution:
ANSWER: PCM = (22,500); ZPM = (112,500)
PERCENTAGE OF COMPLETION METHOD ZERO-PROFIT METHOD
Project Project B Project A Project B
A
Contract Price 945,000 675,000 Contract Price 945,000 675,000
Costs to Date 540,000 630,000 Costs to Date 540,000 630,000
Estimated Costs to Complete 270,000 157,500 Estimated Costs to Complete 270,000 157,500
Estimated Total Costs 810,000 787,500 Estimated Total Costs 810,000 787,500
67
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
Estimated Total Gross Profit (Loss) 135,000 (112,500 Estimated Total Gross Profit (Loss) 135,000 (112,500)
)
Multiply by Rate of Completion 2/3 ---
Gross Profit – TO DATE 90,000 --- Gross Profit (Loss) to recognize 0 (112,500)
Less: Gross Profit – PRIOR YEAR 0 ---
Gross Profit – THIS YEAR 90,000 ---
Total Gross Profit (Loss) for Project A & Project (22,500) Total Gross Profit (Loss) for Project A & Project (112,500)
B B
Under Zero-Profit Method, no profit is recognized if there is profit. If there is loss, it is recognized fully and immediately.
Practice Problem #4
BEST-EVER CONSTRUCTION, INC. recognizes construction revenue and costs using the percentage of completion method. During 2013, a single long-term project was begun which
continued through 2014. Information on the project follows:
2013 2014
Accounts receivable 350,00 1,050,000
0
Incurred costs during the year 367,50 672,000
0
Construction in progress 427,00 1,274,000
0
Billings on contract 350,00 1,470,000
0
The construction accounts are at amounts to date.
Required: What is the gross profit recognized in 2013 and 2014 from this long-term contract?
Solution:
ANSWER: 2013 = 59,500; 2014 = 175,000
CIP
2013 Costs 367,500
2013 Profits ___59,500 ___________
2013 Ending 427,000
Balance
2014 Costs 672,000
2014 Profits __175,000 ___________
2014 Ending 1,274,00
Balance 0
Accounts Receivable is considered only when computing for billings or cash collections. It doesn’t affect the CIP. Billings on contract are also irrelevant because the journal entry is Dr.
Accounts Receivable, Cr. Progress Billings. CIP is also not affected. The statement “construction accounts are at amounts-to-date” indicates the cumulative balance of CIP – having both
the cost and profit component, thus, indicating it is the ending balance per year.
Practice Problem #6
DESTINY CONSTRUCTIONS, INC. started work on three job sites during 2014. The following data pertain to the three jobs at the end of 2014.
Site Contract Costs Est. Costs Billings on Collections on
Price Incurre To Complete Contract Contract
68
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
d
Manil 525,000 393,750 --- 525,000 525,000
a
Cebu 735,000 444,480 296,320 400,000 400,000
Davao 262,500 105,000 105,000 157,500 10,000
Totals 1,522,500 943,230 401,320 1,082,500 1,030,000
Required:
1. On the balance sheet as of the end of 2014, what is the amount of Construction in Progress net of Progress Billings OR the amount of Progress Billings net of Construction
in Progress to be reported using (a) Percentage of Completion Method, and (b) Zero-Profit Method?
2. On the income statement for the year ended December 31, 2014, what is the realized gross profit or (loss) using (a) Percentage of Completion Method, and (b) Zero-
Profit Method?
Solution:
Requirement #1: PCM = 12,430 (current asset) ; ZPM = 13,820 (current liability)
PERCENTAGE OF COMPLETION METHOD ZERO-PROFIT METHOD
Manila Cebu Davao Manila Cebu Davao
Contract Price 525,000 735,000 262,50 Contract Price 525,000 735,000 262,500
0
Costs to Date 393,750 444,480 105,00 Costs to Date 393,750 444,480 105,000
0
Estimated Costs to Complete ________0 296,320 105,00 Estimated Costs to Complete ________0 296,320 105,000
0
Estimated Total Costs 393,750 740,800 210,00 Estimated Total Costs 393,750 740,800 210,000
0
Estimated Total Gross Profit 131,250 (5,800) 52,500 Estimated Total Gross Profit 131,250 (5,800) 52,500
Multiply by Rate of Completion 100% --- 50%
Gross Profit – TO DATE 131,250 (5,800) 26,250 Profit to be recognized 131,250 (5,800) 0
Less: Gross Profit – PRIOR YEAR ________0 ________0 ________0 Add: Incurred Costs 393,750 444,480 105,000
Gross Profit – THIS YEAR 131,250 (5,800) 26,250 Construction in Progress. 12/31/2014 525,000 438,680 105,000
Add: Incurred Costs 393,750 444,480 105,00
0
Construction in Progress, 12/31/2014 525,000 438,680 131,25 Construction in Progress, 12/31/2014 1,068,68
0 0
Progress Billings, 12/31/2014 1,082,50
0
Construction in Progress, 12/31/2014 1,094,93 Excess of PB over CIP (Current (13,820)
0 Liability)
Progress Billings, 12/31/2014 1,082,50
0
Excess of CIP over PB (Current Asset) 12,430
Profit of P131,250 is recognized in the ZPM because the job is already complete.
Requirement #2: PCM = 151,700 ; ZPM = 125,450
Manila Cebu Davao Manila Cebu Davao
Gross Profit – THIS 131,250 (5,800 26,25 Profit to be 131,250 (5,800 0
YEAR ) 0 recognized )
PCM 151,700 ZPM 125,450
Practice Problem #7
The SKYVIEW CORPORATION started work on three contracts during 2014. Data relating to the three jobs are:
Contract Costs Est. Costs Billings on Collections on
Price Incurred To Complete Contract Contract
Contract 400,000 300,000 --- 400,000 320,000
1
Contract 560,000 80,000 320,000 80,000 40,000
2
Contract 200,000 80,000 80,000 --- ---
3
Totals 1,160,000 460,000 400,000 480,000 360,000
Required: Calculate the amount of Construction in Progress to be reported in the year-end balance sheet under percentage of completion.
Solution:
ANSWER: 212,000
Contract 1 Contract Contract 3
2
Contract Price 400,000 560,000 200,000
Costs to Date 300,000 80,000 80,000
Estimated Costs to Complete ________0 320,000 80,000
Estimated Total Costs 300,000 400,000 160,000
Estimated Total Gross Profit 100,000 160,000 40,000
Multiply by Completion Rate ___100% ____20% ____50%
Gross Profit – TO DATE 100,000 32,000 20,000
Less: Gross Profit – PRIOR YEAR ________0 ________0 ________0
Gross Profit – THIS YEAR 100,000 32,000 20,000
Add: Incurred Costs 300,000 80,000 80,000
Construction in Progress, 400,000 112,000 100,000
12/31/2014
Construction in Progress, 212,000
12/31/2014
Note that Contract 1 is already finished because its rate of completion is 100%. Remember that a finished contract leaves a zero balance in the CIP account because the balance of CIP
is closed to Progress Billings account. Thus, only Contract 2 and Contract 3 are added.
Practice Problem #8
RAINBOW INC., a construction company, has a P8,000,000, contract that was started in 2012. The following information is provided for the construction activities.
Constructio Actual Cost Est. Cost to Complete
n Incurred To-Date At Year-End
Years
2012 1,024,000 4,096,000
2013 3,993,600 2,246,400
2014 6,473,600 0
69
Chapter 3 – Revenue Recognition Lesson 10 – Long-Term Construction Contracts
Required: Calculate the amount of gross profit to be reported for 2013 under percentage of completion method.
Solution:
ANSWER: 550,400
2012 2013 2014
Contract Price 8,000,000 8,000,000 8,000,000
Costs to Date 1,024,000 3,993,600 6,473,600
Estimated Costs to Complete 4,096,000 2,246,400 __________0
Estimated Total Costs 5,120,000 6,240,000 6,473,600
Estimated Total Gross Profit 2,880,000 1,760,000 1,526,400
Multiply by Rate of Completion ______20% ______64% ____100%
Gross Profit – TO DATE 576,000 1,126,400 1,526,400
Less: Gross Profit – PRIOR __________0 __576,000 1,126,400
YEAR
Gross Profit – THIS YEAR 576,000 550,400 400,000
70