Contracts: Percentage of completion, completed contract

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.

Attachments

Solution Summary

The 870 word solution presents a comprehensive discussion of the two methods of reporting long-term contracts. Following the narrative explanation of the two methods, there is a cited section showing exactly how revenue is reported for both methods. The attached Excel spreadsheet analyzes Nance's contract for three years including journal entries to be made in 2009 for both methods.