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    Recognition of Profits on long term contracts

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    I am studying for a test that will have the following type of problems listed. I would like to use these as examples to follow in the course book. I pulled up similar topics on the internet but it does not apply to academics

    4. (Recognition of Profit on Long-Term Contracts)

    During 2004 Pierson Company started a construction job with a contract price of $1,500,000. The job was completed in 2006. The following information is available.

    2004 2005 2006

    Costs incurred to $400,000 $935,000 $1,070,000
    Estimated costs to 600,000 165,000 -0-
    Billings to date 300,000 900,000 1,500,000
    Collections to date 270,000 810,000 1,425,000

    a. Compute the amount of gross profit to be recognized each year assuming the
    percentage-of-completion method is used.
    b. Prepare all necessary journal entries for 2005.
    c. Compute the amount of gross profit to be recognized each year assuming the
    completed-contract method is used.

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    Solution Preview

    Hi there,

    Please see the attached Excel spreadsheet.

    Percentage of Completion Method--under the percentage of completion method the taxpayer recognizes a portion of the contract price as income each taxable year based on ...