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Accounting for Contract using Percentage of Completion Method

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Chicago contractors got  $5,400,000 contract to construct a school building for the City of Chicago. Work on this contract began in 2013 and the financial data pertaining to this contract is available here.

Cost incurred till Dec.31, 2013                      $1,080,000
Billings made to City                                      $1,000,000
Amount collected from City                            $  750,000

The estimated future cost to complete this contract is $3,240,000.
(a) Prepare Chicago contractors 2013 journal entries using percentage of completion method.

(b) Show how the contract accounts will appear in the Balance Sheet of Chicago Contractors on 12/31/2013.

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A dynamic Excel file is used to show the given data as well as the suggested solution.
Detailed computation of the percentage of completion amounts is shown prior to the journal entries. An excerpt of the balance sheet is also prepared to show how the contract accounts will appear in the Balance Sheet.

See Also This Related BrainMass Solution

Long term contracts: Profit - Percentage of completion, completed contract method

1. Long term construction contract

In accounting for long term construction contracts (those taking longer than one year to complete), the two methods commonly followed are percentage of completion and completed contract.
a. Discuss how earnings on long term construction contracts are recognized and computed under these two methods.
b. Under what circumstances should one method be used over the other?
c. How are job costs and interim billings reflected on the balance sheet under the percentage of completion method and the completed contract method?

2. Percentage of completion method 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 the contract is as follows:

2007 2008 2009
Total costs incurred to date $1,500,000 $2,640,000 $4,600,000
Estimated costs to complete $2,500,000 $1,760,000 0
Customer billings to date $2,200,000 $4,000,000 $5,600,000
Collections to date $2,000,000 $3,500,000 $5,500,000

a. Complete the revenue and gross profit to be recognized in each year.
b. Prepare the 2009 journal entries to record the construction costs, billings, collections, and revenue recognition
c. Prepare the 2009 journal entries for revenue recognition if the completed contract method was used.

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