ch 06 examples long term contracts

BBUS 3200FALL 2010Chapter 06

Revenue Recognition

EXAMPLE 1: PROFITABLE CONTRACT

The Nifty Construction Company entered into a long-term contract in 2008. The contract price was $1,600,000 and the company initially estimated the total costs of the project to be $1,150,000. The following data pertains to the three years that the contract was in process:

Year

Costs Incurred

During the Year

Estimated Costs at End of Year to

Complete Contract

Billings During the

Year

Collections During the

YearOperating Expenses

2008 $224,000 $896,000 $200,000 $170,000 $80,0002009 712,000 264,000 1,000,000 900,000 82,0002010 344,000 -0- 400,000 430,000 74,000

INSTRUCTIONS1) Calculate the gross profit to be reported in each of the three years using the

percentage-of-completion method.2) Prepare the related journal entries for all three years using the percentage-

of-completion method.3) Prepare a partial balance sheet and a partial income statement at the end of

each of the three years using the percentage-of-completion method. HINT: Use T-accounts to post the above journal entries to determine the year end balance sheet amounts.

4) Calculate the gross profit to be reported in each of the three years using the completed contract method.

5) Prepare the related journal entries for all three years using the completed contract method. Before you prepare all of the journal entries over again, think: which entries will be the same as under the percentage-of-completion method and which entries will be different?

6) Prepare a partial balance sheet and a partial income statement at the end of each of the three years using the completed contract method. HINT: Use T-accounts to post the above journal entries to determine the year end balance sheet amounts.


Revenue Recognition

(1)

2008 2009 2010

Contract price: (A) $1,600,000 $1,600,000 $1,600,000

Costs:

Opening balance of costs -0- 224,000 936,000

Costs incurred during year 224,000 712,000 344,000

Costs incurred to date (B) 224,000 936,000 1,280,000Estimated costs to complete 896,000 264,000 -0-

Total estimated costs (C) 1,120,000 1,200,000 1,280,000

Percentage complete (B/C) 20% 78% 100%

Revenue to date(A x % complete) 320,000 1,248,000 1,600,000

Less previous revenue -0- <320,000> <1,248,000>

Revenue for the year (D) 320,000 928,000 352,000

Construction costs for the year (E) 224,000 712,000 344,000

Gross profit for this year (D) – (E) 96,000 216,000 8,000


Revenue Recognition

(2)2009 2010 2011

DR CR DR CR DR CRCIP 224,000 712,000 344,000

80,000 82,000 74,000 A/P, etc

304,000 794,000 418,000

A/R 200,000 1,000,000 400,000 Billings 200,000 1,000,000 400,000

Cash 170,000 900,000 430,000 A/R 170,000 900,000 430,000

Cons exp 224,000 712,000 344,000CIP 96,000 216,000 8,000 Rev 320,000 928,000 352,000

Billings 1,600,000 CIP 1,600,000

(3)Vaughan Construction Ltd.Partial Income Statement

For the Year Ended December 312009 2010 2011

Revenue from L/T contract 320,000 928,000 352,000Construction expenses 224,000 712,000 344,000Gross profit 96,000 216,000 8,000


Revenue Recognition

Vaughan Construction Ltd.Partial Balance Sheet

December 312009 2010 2011

Accounts receivable $ 30,000 $130,000 $100,000Construction in process 320,000 1,248,000 -0-Less: billings <200,000> <1,200,000> -0-

120,000 48,000

(4)2009: -0- 2010: -0- 2011: $320,000

(5)2009 2010 2011

DR CR DR CR DR CRCIP 224,000 712,000 344,000

80,000 82,000 74,000 A/P, etc 304,000 792,000 418,000

A/R 200,000 1,000,000 400,000 Billings 200,000 1,000,000 400,000

Cash 170,000 900,000 430,000 A/R 170,000 900,000 430,000

Cons exp 1,280,000CIP 320,000 Rev 1,600,000

Billings 1,600,000 CIP 1,600,000


Revenue Recognition

(6)Vaughan Construction Ltd.Partial Income Statement

For the Year Ended December 312009 2010 2011

Revenue from L/T contract -0- -0- 1,600,000Construction expenses -0- -0- 1,280,000Gross profit -0- -0- 320,000

Vaughan Construction Ltd.Partial Balance Sheet

December 312009 2010 2011

Accounts receivable $ 30,000 $130,000 $100,000Construction in process 224,000 936,000 -0-Less: billings <200,000> <1,200,000> -0-

24,000 <264,000>*

*reclassify as liability on balance sheet


Revenue Recognition

EXAMPLE 2: OVERALL PROFITABLE CONTRACT WITH INTERIM LOSS

At the beginning of 2008, Build-a-lot Construction Company signed a fixed-price contract to construct a sports arena at a price of $26,000,000. Information relating to the costs and billings for this contract is as follows:

2008 2009 2010Costs incurred during the period $8,320,000 $11,360,000 $3,520,000Estimated costs to complete, as of Dec 31 12,480,000 4,320,000 -0-Billings during the year 3,900,000 15,900,000 6,200,000Collections during the year 3,120,000 12,000,000 10,880,000

INSTRUCTIONS1) Assuming the percentage-of-completion method is used, calculate the gross

profit to be recognized in each of 2008, 2009, and 2010.2) Assuming the percentage-of-completion method is used, prepare the related

journal entries for all three years.3) Assuming the percentage-of-completion method is used, show how the

details related to this construction contract would be disclosed on the balance sheet at December 31, 2010 and on the income statement for the year ended December 31, 2010.

4) Assuming the completed contract method is used, calculate the gross profit to be recognized in each of 2008, 2009, and 2010.

5) Assuming the completed contract method is used, prepare the related journal entries for all three years.

6) Assuming the completed contract method is used, show how the details related to this construction contract would be disclosed on the balance sheet at December 31, 2010 and on the income statement for the year ended December 31, 2010.


Revenue Recognition

(1)

2008 2009 2010

Contract price: (A) 26,000,000 26,000,000 26,000,000

Costs:

Opening balance of costs -0- 8,320,000 19,680,000

Costs incurred during year 8,320,000 11,360,000 3,520,000

Costs incurred to date (B) 8,320,000 19,680,000 23,200,000Estimated costs to complete 12,480,000 4,320,000 -0-


Percentage complete (B/C) 40% 82% 100%

Revenue to date(A x % complete) 10,400,000 21,320,000 26,000,000

Less previous revenue -0- 10,400,000 21,320,000

Revenue for the year (D) 10,400,000 10,920,000 4,680,000

Construction costs for the year (E) 8,320,000 11,360,000 3,520,000

Gross profit for this year (D) – (E) 2,080,000 <440,000> 1,160,000


Revenue Recognition

(2)2008 2009 2010

DR CR DR CR DR CRCIP 8,320 11,360 3.520 A/P, etc 8,320 11,360 3,520

A/R 3,900 15,900 6,200 Billings 3,900 15,900 6,200

Cash 3,120 12,000 10,880 A/R 3,120 12,000 10,880

Cons exp 8,320 11,360 3,520CIP 2,080 440 1,160 Rev 10,400 10,920 4,680

Billings 26,000 CIP 26,000

(3)Build-a-lot Construction Company

Partial Income StatementFor the Year Ended December 31

2008 2009 2010Revenue from L/T contract $10,400,000 $10,920,000 $4,680,000Construction expenses 8,320,000 11,360,000 3,520,000Gross profit 2,080,000 <440,000> 4,680,000


Revenue Recognition

Build-a-lot Construction CompanyPartial Balance Sheet

December 312008 2009 2010

Accounts receivable 780,000 4,680,000 -0-Construction in process 10,400,000 21,320,000 -0-Less: billings 3,900,000 19,800,000 -0-

6,500,000 1,520,000

(4)

(5)2008 2009 2010

DR CR DR CR DR CRCIP 8,320 11,360 3.520 A/P, etc 8,320 11,360 3,520

A/R 3,900 15,900 6,200 Billings 3,900 15,900 6,200

Cash 3,120 12,000 10,880 A/R 3,120 12,000 10,880

Cons exp 3,520CIP 1,160 Rev 4,680

Billings 26,000 CIP 26,000


Revenue Recognition

(6)Build-a-lot Construction Company

Partial Income StatementFor the Year Ended December 31

2008 2009 2010Revenue from L/T contract -0- -0- $26,000Construction expenses -0- -0- 23,200Gross profit -0- -0- 2,800

Build-a-lot Construction CompanyPartial Balance Sheet

December 312008 2009 2010

Accounts receivable 780,000 4,680,000 -0-Construction in process 8,320,000 19,680,000 -0-Less: billings 3,900,000 19,800,000 -0-

4,420,000 <120,000>*

*reclassify as liability on balance sheet


Revenue Recognition

EXAMPLE 3: CONTRACT WITH OVERALL LOSS

PROBLEM 6-4

(a)2010 2011 2012

Contract price: (A) $15,500,000 $15,500,000 $15,500,000

Costs:Opening balance of costs 0 4,500,000 13,790,000

Costs incurred during year 4,500,000 9,290,000 1,910,000

Costs incurred to date (B) 4,500,000 13,790,000 15,700,000

Estimated costs to complete 10,500,000 1,934,000 0


Percentage complete (B/C) 30.00%* 87.70%** 100.0%

Revenue to date (A x % complete) 4,650,000 13,593,500 15,500,000

Less previous revenue (4,650,000) (13,593,500)

Revenue for the year (D) 4,650,000 8,943,500 1,906,500

Construction costs for year (E) 4,500,000 9,317,500 1,882,500

Gross profit for this year (D-E) $150,000 $(374,000) $24,000

* 100% of the loss to date is recognized: $15,500,000 - $13,790,000 - $1,934,000 - $150,000 = ($374,000)** $150,000 - $374,000 + $24,000 = $200,000 final loss. (b)


Revenue Recognition

2010:Construction in Process................................ 4,500,000

Materials, Cash, Payables, etc............... 4,500,000

Accounts Receivable..................................... 4,600,000Billings on Construction in Process..... 4,600,000

Cash................................................................. 3,000,000Accounts Receivable.............................. 3,000,000

Construction in Process................................ 150,000Construction Expenses................................. 4,500,000

Revenue from Long-term Contracts [from (a)] 4,650,0002011:Construction in Process................................ 9,290,000


Accounts Receivable(10,000 – 4,600).............. 5,400,000Billings on Construction in Process..... 5,400,000

Cash (9,000 – 3,000).......................................... 6,000,000Accounts Receivable.............................. 6,000,000

Construction Expenses................................. 9,317,500Construction in Process (Loss)............ 374,000Revenue from Long-term Contracts [from (a)] 8,943,500

Under the percentage of completion method, the increase in costs requires an adjustment in the current period for the excess profit that was recognized on the project in prior years.

2012:Construction in Process................................ 1,910,000


Accounts Receivable..................................... 5,500,000


Revenue Recognition

Billings on Construction in Process..... 5,500,000

Cash................................................................. 6,500,000Accounts Receivable.............................. 6,500,000

Construction in Process................................ 24,000Construction Expenses................................. 1,882,500

Revenue from Long-term Contracts [from (a)] 1,906,500

Billings on Construction in Process............. 15,500,000Construction in Process......................... 15,500,000

(c) and (d)2010:Income Statement

Revenue from long-term contract $4,650,000Costs of construction 4,500,000Gross profit $150,000

Balance Sheet (12/31/10)—Current assets:

Receivables(4,600 – 3,000)—construction in process $ 1,600,000Inventories—construction in process totalling

$4,650,000** less billings of $4,600,000 50,000

**Total cost to date $4,500,0002010 Gross profit 150,000

$4,650,000

2011:Income Statement

Revenue from long-term contract $8,943.500Costs of construction 9,317,500Gross profit (loss) ($374,000)


Revenue Recognition


Receivables(10,000,000-9,000,000)—construction in process $1,000,000

Inventories—construction in process totalling $13,566,000** less billings of $10,000,000 3,566,000

** Balance Dec. 31, 2010 $4,650,000

2011 Construction Costs 9,290,0002011 Gross profit (loss) (374,000)

$13,566,000

(e) In 2010, no gross profit would be recognized.

In 2011, the contract loss of $224,000 is recognized and recorded as follows:

Loss from Long-term Contracts........................ 224,000Construction in Process (Loss).................. 224,000

Under the completed contract, when costs estimates at the end of the period indicate a loss will result once the contract is completed, that entire loss must be recognized in the current period.

In 2012:Income Statement

Revenue from long-term contracts $15,500,000Costs of construction 15,476,000Gross profit $24,000


Revenue Recognition

(f)Billings on Construction in Process................. 15,500,000

Revenue from Long-term Contracts........... 15,500,000Costs of Construction........................................ 15,476,000

Construction in Process.............................. 15,476,000

(g)Balance Sheet (12/31/10)—

Current assets:Receivables—construction in process $ 1,600,000

Current liabilities: Billings of $4,600,000 in excess of

contract cost $4,500,000* 100,000

*Total cost to date $4,500,000


Receivables—construction in process $ 1,000,000

Inventories—construction in process totalling $13,566,000** less billings of $10,000,000 3,566,000

** Balance Dec. 31, 2010 $4,500,0002010 Construction Costs 9,290,000Loss to date accrued (224,000)

$ 13,566,000

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