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Chapter 18: Question 33E-b (page 1040)

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 鈥�0鈥�

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(b) Prepare all necessary journal entries for 2018.

Short Answer

Expert verified

Revenue from long-term contract is $560,000.

Step by step solution

01

Meaning of Long-Term Contract

A long-term contractis when you commit to working for someone else for an extended period of time. Because the parties will never need to amend or renegotiate the contract as the future unfolds, a long-term contract is also considered complete.

02

Journal entries for 2018

Date

Particular

Debit ($)

Credit ($)

Construction in process a/c

425,000

Materials, cash, payables, etc. a/c

425,000

Accounts receivables a/c

600,000

Billing on construction in process a/c

600,000

Construction expenses a/c

425,000

Construction in process a/c

135,000

Revenue from long term contract a/c

560,000

Working Notes:

Materialcash,payablesetc=Costincurredin2018-Costincurredin2018=$825,000-$400,000=$425,000

Accountreceivables=Billingtodate2018-Billingtodatein2017=$900,000-$300,000=$600,000

Revenue=(Contractprice脳Percentageofcompletionin2018)-(Contractprice脳Percentageofcompletionin2017)=($1,600,000脳75%)-($1,600,000脳40%)=(1,200,000-$640,000)=$560,000

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(Gross Profit on Uncompleted Contract) On April 1, 2017, Dougherty Inc. entered into a cost plus fixed fee contract to construct an electric generator for Altom Corporation. At the contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of \(2,000,000. The fixed fee stipulated in the contract is \)450,000. Dougherty appropriately accounts for this contract under the percentage-of-completion method. During 2017, Dougherty incurred costs of \(800,000 related to the project. The estimated cost at December 31, 2017, to complete the contract is \)1,200,000. Altom was billed $600,000 under the contract.

Instructions

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