Long Term Construction Contracts

1. Reese Construction Corporation contracted contracted to construct a building for $1,500,000. Construction began in 2007 and was completed in 2008. Data relating to the contract are summarized below: Year ended December 31, 2007 2008 Costs incurred $600,000 $450,000 Estimated costs to complete 400,000 — Reese uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2007, and 2008, respectively, Reese should report gross profit of a. $270,000 and $180,000. b. $900,000 and $600,000. c. $300,000 and $150,000. d. $0 and $450,000. C 2. Winsor Construction Company uses the percentage-of-completion method of accounting. In 2007, Winsor began work on a contract it had received which provided for a contract price of $15,000,000. Other details follow: 2007 Costs incurred during the year $7,200,000 Estimated costs to complete as of December 31 4,800,000 Billings during the year 6,600,000 Collections during the year 3,900,000 What should be the gross profit recognized in 2007? a. $600,000 b. $7,800,000 c. $1,800,000 d. $3,000,000 c In 2007, Crane Corporation began construction work under a three-year contract. The contract price is $2,400,000. Crane uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2007, follow: Balance Sheet Accounts receivable—construction contract billings Construction in progress Less contract billings Costs and recognized profit in excess of billings Income Statement Income (before tax) on the contract recognized in 2007

$100,000 $300,000 240,000 60,000 $60,000

3.

How much cash was collected in 2007 on this contract? a. $100,000 b. $140,000 c. $20,000 d. $240,000 b

4.

What was the initial estimated total income before tax on this contract? a. $300,000 b. $320,000 c. $400,000 d. $480,000 d

5.

Eaton Construction Co. uses the percentage-of-completion method. In 2007, Eaton began work on a contract for $3,300,000 and it was completed in 2008. Data on the costs are: Year Ended December 31 2007 2008 Costs incurred $1,170,000 $840,000 Estimated costs to complete 780,000 — For the years 2007 and 2008, Eaton should recognize gross profit of a. b. c. d.

2007 $0 $774,000 $810,000 $810,000

2008 $1,290,000 $516,000 $480,000 $1,290,000

c Use the following information for questions 66 and 67. Ramos, Inc. began work in 2007 on contract #3814, which provided for a contract price of $7,200,000. Other details follow: 2007 2008 Costs incurred during the year $1,200,000 $3,675,000 Estimated costs to complete, as of December 31 3,600,000 0 Billings during the year 1,350,000 5,400,000 Collections during the year 900,000 5,850,000

6.

Assume that Ramos uses the percentage-of-completion method of accounting. The portion of the total gross profit to be recognized as income in 2007 is

a. b. c. d.

$450,000. $600,000. $1,800,000. $2,400,000.

B 7.

Assume that Ramos uses the completed-contract method of accounting. The portion of the total gross profit to be recognized as income in 2008 is a. $900,000. b. $1,350,000. c. $2,325,000. d. $7,200,000.

c Use the following information for questions 68 and 69. Miley, Inc. began work in 2007 on a contract for $8,400,000. Other data are as follows: 2007 2008 Costs incurred to date $3,600,000 $5,600,000 Estimated costs to complete 2,400,000 — Billings to date 2,800,000 8,400,000 Collections to date 2,000,000 7,200,000 8.

If Miley uses the percentage-of-completion method, the gross profit to be recognized in 2007 is a. $1,440,000. b. $1,600,000. c. $2,160,000. d. $2,400,000. A

9.

If Miley uses the completed-contract method, the gross profit to be recognized in 2008 is a. $1,360,000. b. $2,800,000. c. $1,400,000. d. $5,600,000. B

10.

Parker Construction Co. uses the percentage-of-completion method. In 2007, Parker began work on a contract for $5,500,000; it was completed in 2008. The following cost data pertain to this contract: Year Ended December 31 2007 2008 Cost incurred during the year $1,950,000 $1,400,000 Estimated costs to complete at the end of year 1,300,000 —

The amount of gross profit to be recognized on the income statement for the year ended December 31, 2008 is a. $800,000. b. $860,000. c. $900,000. d. $2,150,000. A 11.

If the completed-contract method of accounting was used, the amount of gross profit to be recognized for years 2007 and 2008 would be a. b. c. d.

2007 $2,250,000. $2,150,000. $0. $0.

2008 $0. $(100,000). $2,150,000. $2,250,000.

C 12.

Willingham Construction Company uses the percentage-of-completion method. During 2007, the company entered into a fixed-price contract to construct a building for Richman Company for $30,000,000. The following details pertain to the contract: At December 31, 2007 Percentage of completion 25% Estimated total cost of contract $22,500,000 Gross profit recognized to date 1,875,000

At December 31, 2008 60% $25,000,000 3,000,000

The amount of construction costs incurred during 2008 was a. $15,000,000. b. $9,375,000. c. $5,625,000. d. $2,500,000. B Use the following information for questions 73 and 74. Carter Construction Company had a contract starting April 2008, to construct a $15,000,000 building that is expected to be completed in September 2009, at an estimated cost of $13,750,000. At the end of 2008, the costs to date were $6,325,000 and the estimated total costs to complete had not changed. The progress billings during 2008 were $3,000,000 and the cash collected during 2008 was $2,000,000. Carter uses the percentage-of-completion method. 13.

For the year ended December 31, 2008, Carter would recognize gross profit on the building of a. $0. b. $527,083. c. $575,000. d. $675,000. c

14.

At December 31, 2008, Carter would report Construction in Process in the amount of a. $6,900,000. b. $6,325,000. c. $5,900,000. d. $575,000. A

15.

Kirby Builders, Inc. is using the completed-contract method for a $5,600,000 contract that will take two years to complete. Data at December 31, 2007, the end of the first year, are as follows: Costs incurred to date Estimated costs to complete Billings to date Collections to date

$2,560,000 3,280,000 2,400,000 2,000,000

The gross profit or loss that should be recognized for 2007 is a. $0. b. a $240,000 loss. c. a $120,000 loss. d. a $105,600 loss. B Use the following information for questions 76 through 78. Melton Construction Co. began operations in 2007. Construction activity for 2007 is shown below. Melton uses the completed-contract method.

Contract 1 2 3 16.

Contract Price $3,200,000 3,600,000 3,300,000

Billings Through 12/31/07 $3,150,000 1,500,000 1,900,000

Collections Through 12/31/07 $2,600,000 1,000,000 1,800,000

Costs to 12/31/07 $2,150,000 820,000 2,250,000

Estimated Costs to Complete — $1,880,000 1,200,000

Which of the following should be shown on the income statement for 2007 related to Contract 1? a. Gross profit, $450,000 b. Gross profit, $1,000,000 c. Gross profit, $1,050,000 d. Gross profit, $600,000 c

17.

Which of the following should be shown on the balance sheet at December 31, 2007 related to Contract 2? a. Inventory, $680,000 b. Inventory, $820,000 c. Current liability, $680,000 d. Current liability, $1,500,000 c

18.

Which of the following should be shown on the balance sheet at December 31, 2007 related to Contract 3? a. Inventory, $200,000 b. Inventory, $350,000 c. Inventory, $2,100,000 d. Inventory, $2,250,000 a

19 Flynn Construction Co. has consistently used the percentage-of-completion method of recognizing revenue. During 2007, Flynn entered into a fixed-price contract to construct an office building for $12,000,000. Information relating to the contract is as follows: At December 31 2007 2008 Percentage of completion 15% 45% Estimated total cost at completion $9,000,000 $9,600,000 Gross profit recognized (cumulative) 600,000 1,440,000 Contract costs incurred during 2008 were a. $2,880,000. b. $2,970,000. c. $3,150,000. d. $4,320,000. b

20.

Noland Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2007, Noland started work on a $35,000,000 construction contract that was completed in 2008. The following information was taken from Noland's 2007 accounting records: Progress billings Costs incurred Collections Estimated costs to complete

$11,000,000 10,500,000 7,000,000 21,000,000

What amount of gross profit should Noland have recognized in 2007 on this contract? a. $3,500,000 b. $2,333,334 c. $1,750,000 d. $1,166,667 d computational: 1.

c

$600,000 —————————— × ($1,500,000  – $1,000,000) = $300,000 $600,000 + $400,000 ($1,500,000  – $1,050,000)  – $300,000 = $150,000.

2.

c

$7,200,000 ——————————— × ($15,000,000  – $12,000,000) = $1,800,000. $7,200,000 + $4,800,000

3.

b

$240,000  – $100,000 = $140,000.

4.

d

$300,000  – $60,000 = $240,000 $240,000 ————————— × ($2,400,000  – Total estimated cost) = $60,000 Total estimated cost Total estimated cost = $1,920,000 $2,400,000  – $1,920,000 = $480,000.

5.

c

$1,170,000 —————- × ($3,300,000  – $1,950,000) = $810,000 $1,950,000 ($3,300,000  – $2,010,000)  – $810,000 = $480,000.

6.

b

$1,200,000 ————— × ($7,200,000  – $4,800,000) = $600,000. $4,800,000

7.

c

$7,200,000  – $4,875,000 = $2,325,000.

8.

a

$3,600,000 ————— × ($8,400,000  – $6,000,000) = $1,440,000. $6,000,000

9.

b

$8,400,000  – $5,600,000 = $2,800,000.

10.

a

[$1,950,000 ÷ ($1,950,000 + $1,300,000)] × $2,250,000 = $1,350,000 ($5,500,000  – $3,350,000)  – $1,350,00 = $800,000.

11.

c

$5,500,000  – $3,350,000 = $2,150,000.

12.

b

($25,000,000 × .60) – ($22,500,000 × .25) = $9,375,000.

13.

c

($6,325,000 ÷ $13,750,000) × $1,250,000 = $575,000.

14.

a

($6,325,000 ÷ $13,750,000) × $1,250,000 = $575,000. $6,325,000 + $575,000 = $6,900.000.

15.

b

$5,600,000  – ($2,560,000 + $3,280,000) = –$240,000.

16.

c

$3,200,000  – $2,150,000 = $1,050,000.

17.

c

$1,500,000  – $820,000 = $680,000.

18.

a

($2,250,000  – $150,000)  – $1,900,000 = $200,000.

19.

b

($9,600,000 × 45%)  – ($9,000,000 × 15%) = $2,970,000.

20.

d

$10,500,000 —————— × ($35,000,000  – $31,500,000) = $1,166,667. $31,500,000

Ex. 18-110—Percentage-of-completion method.

Garnet Construction Co. contracted to build a bridge for $5,000,000. Construction began in 2007 and was completed in 2008. Data relating to the construction are: Costs incurred Estimated costs to complete

2007 $1,650,000 1,350,000

2008 $1,375,000 —

Garnet uses the percentage-of-completion method. Instructions

(a) (b) (c) (d)

How much revenue should be reported for 2007? Show your computation. Make the entry to record progress billings of $1,650,000 during 2007. Make the entry to record the revenue and gross profit for 2007. How much gross profit should be reported for 2008? Show your computation.

Solution 18-110

(a)

(b)

$1,650,000 ————— × $5,000,000 = $2,750,000 $3,000,000 Accounts Receivable ................................................................... 1,650,000 Billings on Construction in Process .................................

Solution 18-110

(c)

(d)

1,650,000

(cont.)

Construction Expenses................................................................ 1,650,000 Construction in Process............................................................... 1,100,000 Revenue from Long-Term Contracts ................................ Revenue Costs Total gross profit Recognized in 2007 Recognized in 2008 Or Total revenue Recognized in 2007 Recognized in 2008 Costs in 2008 Gross profit in 2008

2,750,000

$5,000,000 3,025,000 1,975,000 (1,100,000) $ 875,000 $5,000,000 (2,750,000) 2,250,000 (1,375,000) $ 875,000

Ex. 18-111—Percentage-of-completion method.

Stiner Builders contracted to build a high-rise for $14,000,000. Construction began in 2007 and is expected to be completed in 2010. Data for 2007 and 2008 are: Costs incurred to date Estimated costs to complete

2007 $1,800,000 7,200,000

2008 $5,200,000 4,800,000

Stiner uses the percentage-of-completion method. Instructions

(a) How much gross profit should be reported for 2007? Show your computation. (b) How much gross profit should be reported for 2008? (c) Make the journal entry to record the revenue and gross profit for 2008.

Solution 18-111

(a)

$1,800,000 ————— × $5,000,000 = $1,000,000 $9,000,000

(b)

$5,200,000 —————— × $4,000,000 = $2,080,000 $10,000,000 Less 2007 gross profit Gross profit in 2008

(c)

1,000,000 $1,080,000

Construction in Process............................................................... 1,080,000 Construction Expenses................................................................ 3,400,000 Revenue from Long-Term Contracts ................................

Ex. 18-112—Percentage-of-completion

4,480,000

and completed-contract methods.

On February 1, 2007, Nance Contractors agreed to construct a building at a contract price of $6,000,000. Nance estimated total construction costs would be $4,000,000 and the project would be finished in 2009. Information relating to the costs and billings for this contract is as follows: Total costs incurred to date Estimated costs to complete Customer billings to date Collections to date

2007 $1,500,000 2,500,000 2,200,000 2,000,000

2008 $2,640,000 1,760,000 4,000,000 3,500,000

2009 $4,600,000 -05,600,000 5,500,000

Instructions

Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and for completed-contract accounting, show the gross profit that should be recorded for 2007, 2008, and 2009. Percentage-of-Completion Completed-Contract Gross Profit Gross Profit 2007

__________

2007

__________ 

2008

__________

2008

__________ 

2009

__________

2009

__________ 

Solution 18-112

2007 2008 2009

Percentage-of-Completion Gross Profit a $750,000 b $210,000 c $440,000

2007 2008 2009

Completed-Contract Gross Profit — — d $1,400,000

a

$1,500,000 ————— × $2,000,000 = $750,000 $4,000,000

b

$2,640,000 ————— × $1,600,000 = $960,000 $4,400,000

Less 2007 gross profit 2008 gross profit

(750,000) $210,000

c

$6,000,000 4,600,000 1,400,000 (960,000) $ 440,000

d

$6,000,000 4,600,000 $1,400,000

Total revenue Total costs Total gross profit Recognized to date 2009 gross profit Total revenue Total costs Total gross profit

Pr. 18-117—Long-term

construction project accounting.

Benson Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost to cost basis. Benson began work on a lump-sum contract at the beginning of 2008. As bid, the statistics were as follows: Lump-sum price (contract price) Estimated costs Labor Materials and subcontractor Indirect costs

$4,000,000 $ 850,000 1,750,000 400,000

3,000,000 $1,000,000

Pr. 18-117

(cont.)

At the end of the first year, the following was the status of the contract: Billings to date Costs incurred to date Labor Materials and subcontractor Indirect costs Latest forecast total cost

$2,230,000 $ 464,000 1,098,000 193,000

1,755,000 3,000,000

It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered in the costs incurred to date. Instructions

(a)

Compute the percentage of completion on the contract at the end of 2008.

(b)

Indicate the amount of gross profit that would be reported on this contract at the end of 2008.

(c)

Make the journal entry to record the income (loss) for 2008 on Benson's books.

(d)

Indicate the account(s) and the amount(s) that would be shown on the balance sheet of Benson Construction at the end of 2008 related to its construction accounts. Also indicate where these items would be classified on the balance sheet. Billings collected during the year amounted to $1,980,000.

(e)

Assume the latest forecast on total costs at the end of 2008 was $4,050,000. How much income (loss) would Benson report for the year 2008?

Solution 18-117

(a)

Costs to date Less materials on job site

$1,755,000 (105,000) $1,650,000

Costs Incurred to Date —————————— = Percentage of Completion Total Estimated Costs $1,650,000 ————— = 55% $3,000,000 (b)

55% × $4,000,000 = Costs incurred Gross profit

(c)

Construction Expense ................................................................. 1,650,000 Construction in Process............................................................... 550,000 Revenue from Long-Term Project ....................................

(d)

Current Assets Accounts receivable

$2,200,000 1,650,000 $ 550,000

2,200,000

$250,000 ($2,230,000 – $1,980,000)

Solution 18-117

(cont.)

Current Liability Billings in excess of contract costs and recognized profit (e)

Total loss reported in 2008 Contract price Estimated cost to complete Amount of loss to be reported

Pr. 18-118—Accounting

$30,000 ($2,230,000 – $2,200,000) $4,000,000 4,050,000 $ (50,000)

for long-term construction contracts.

The board of directors of Dodd Construction Company is meeting to choose between the completed-contract method and the percentage-of-completion method of accounting for longterm contracts in the company's financial statements. You have been engaged to assist Dodd's controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information: 1. 2.

Dodd commenced doing business on January 1, 2008. Construction activities for the year ended December 31, 2008, were as follows: Project A B C D E

Project A B C D E 3. 4.

Total Contract Price $ 515,000 690,000 475,000 200,000 480,000 $2,360,000

Billings Through 12/31/08 $ 340,000 210,000 475,000 100,000 400,000 $1,525,000

Contract Costs Incurred Through 12/31/08 $ 424,000 195,000 350,000 123,000 320,000 $1,412,000

Estimated Additional Costs to Complete Contracts $101,000 455,000 -097,000 80,000 $733,000

Cash Collections Through 12/31/08 $ 310,000 210,000 390,000 65,000 400,000 $1,375,000

Each contract is with a different customer. Any work remaining to be done on the contracts is expected to be completed in 2009.

Instructions

(a)

Prepare a schedule by project, computing the amount of income (or loss) before selling, general, and administrative expenses for the year ended December 31, 2008, which would be reported under: (1) The completed-contract method.

(2) The percentage-of-completion method (based on estimated costs). Pr. 18-118

(cont.)

(b)

Prepare the general journal entry(ies) to record revenue and gross profit on project B (second project) for 2008, assuming that the percentage-of-completion method is used.

(c)

Indicate the balances that would appear in the balance sheet at December 31, 2008 for the following accounts for Project D (fourth project), assuming that the percentage-ofcompletion method is used. Accounts Receivable Billings on Construction in Process Construction in Process

(d)

How would the balances in the accounts discussed in part (c) change (if at all) for Project D (fourth project), if the completed-contract method is used?

Solution 18-118

(a) (1) and (2) Projects Contract price Contract costs incurred Additional costs to complete Total cost Total gross profit or (loss)

A $515,000 424,000

B $690,000 195,000

C $475,000 350,000

D $200,000 123,000

E $480,000 320,000

101,000 525,000

455,000 650,000

-0350,000

97,000 220,000

80,000 400,000

$ 40,000

$125,000

$ (20,000)

$ 80,000

$ (10,000)

The amount reported as income (loss) under the completed-contract method for 2008 is: Project A B C D E

$(10,000) -0125,000 (20,000) -0$ 95,000

The amount reported as income (loss) under the percentage-of-completion method for 2008 is: Project A B C D E (b)

$(10,000) 12,000 125,000 (20,000) 64,000 $171,000

$40,000 × ($195,000 ÷ $650,000) $80,000 × ($320,000 ÷ $400,000)

Construction in Process............................................................... Construction Expenses................................................................

12,000 195,000

Revenue from Long-term Contracts ................................. Solution 18-118

(c)

(d)

207,000

(cont.)

Billings Cash collections Accounts receivable Billings on Construction in Process

$100,000 65,000 $ 35,000 100,000

Costs incurred Loss reported Construction in process

$123,000 (20,000) $103,000

The account balances would be the same.

Pr. 18-119—Long-term

contract accounting (completed-contract).

Ponce Construction, Inc. experienced the following construction activity in 2008, the first year of operations. Cash Cost Estimated Total Billings Collections Incurred Additional Contract through through through Costs to Contract Price 12/31/08 12/31/08 12/31/08 Complete X $260,000 $165,000 $155,000 $182,000 $ 63,000 Y 330,000 115,000 115,000 100,000 247,000 Z 233,000 233,000 198,000 158,000 -0$823,000 $513,000 $468,000 $440,000 $310,000 Each of the above contracts is with a different customer, and any work remaining at December 31, 2008 is expected to be completed in 2009. Instructions

Prepare a partial income statement and a partial balance sheet to indicate how the above contract information would be reported. Ponce uses the completed-contract method.

Solution 18-119

Ponce Construction, Inc. Income Statement For the Year 2008 Revenue from long-term contracts (contract Z) Cost of construction (contract Z) Gross profit Provision for loss (contract Y)* *Contract costs through 12/31/08 Estimated costs to complete Total estimated costs

$233,000 158,000 $ 75,000 17,000 $100,000 247,000 347,000

Total contract price Loss recognized in 2008

330,000 $ 17,000

Solution 18-119

(cont.) Ponce Construction, Inc. Balance Sheet As of 12/31/08

Current assets: Accounts receivable ($513,000  – $468,000) Inventories Construction in process (contract X) Less: Billings Unbilled contract costs Current liabilities: Billings ($115,000) in excess of contract costs ($100,000) Estimated loss from long-term contracts

$ 45,000 $182,000 165,000 17,000 15,000 17,000