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Chapter 18: Q,18-9P_2 (page 1045)

Question: P18-9 (LO5,6) EXCEL (Recognition of Profit on Long-Term Contract) Shanahan Construction Company has entered into a contract beginning January 1, 2017, to build a parking complex. It has been estimated that the complex will cost \(600,000 and will take 3 years to construct. The complex will be billed to the purchasing company at \)900,000. The following data pertain to the construction period.

2017

2018

2019

Cost to date

\(270,000

\)450,000

$610,000

Estimated cost to Complete

330,000

150,000

-

Progress billing to date

270,000

550,000

900,000

Cash collected to date

240,000

500,000

900,000

Instructions

Using the completed-contract method, compute the estimated gross profit that would be recognized during each year of the construction period.

Short Answer

Expert verified

Answer

A gross profit of$290,000 will be recognized in 2019 under the complete contract method.

Step by step solution

01

Definition of Complete Contract Method

The method used to account for a contract under which the revenue and gross profit will be recognized only when the contract gets completed known as the complete contract method.

02

 Step 2: Gross profit under complete contract method

Particular

Amount $

Total billing

$900,000

Less: Total cost

($610,000)

Gross profit recognized in the year 2019

$290,000

No gross profit will be recognized for 2017 and 2018 because the contract gets completed in 2019.

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Most popular questions from this chapter

Travel Inc. sells tickets for a Caribbean cruise on ShipAway Cruise Lines to Carmel Company employees. The total cruise package price to Carmel Company employees is \(70,000. Travel Inc. receives a commission of 6% of the total price. Travel Inc. therefore remits \)65,800 to ShipAway. Prepare the journal entry to record the remittance and revenue recognized by Travel Inc. on this transaction.

Nate Beggs signs a 1-year contract with BlueBox Video. The terms of the contract are that Nate is required to pay a nonrefundable initiation fee of \(100. No annual membership fee is charged in the first year. After the first year, membership can be renewed by paying an annual membership fee of \)5 per month. BlueBox determines that its customers, on average, renew their annual membership three times after the first year before terminating their membership. What amount of revenue should BlueBox recognize in its first year?

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay \(10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to \)8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.

Instructions

(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.

(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.

(c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.

What are the two basic methods of accounting for long-term construction contracts? Indicate the circumstances that determine when one or the other of these methods should be used.

(Existence of a Contract) On May 1, 2017, Richardson Inc. entered into a contract to deliver one of its specialty mowers to Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of \(900 in advance on May 15, 2017. Kickapoo pays Richardson on May 15, 2017, and Richardson delivers the mower (with cost of \)575) on May 31, 2017.

Instructions

(a) Prepare the journal entry on May 1, 2017, for Richardson.

(b) Prepare the journal entry on May 15, 2017, for Richardson.

(c) Prepare the journal entry on May 31, 2017, for Richardson.
See all solutions

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