a) Using the above data, compute the gross profit to be recognized for each of the three years, assuming that the outcome of the contract can be reliably estimated. b) Prepare the journal entries for 2019, 2020, and 2021 financial year to recognize revenue on the assumption that the measure of progress on the contract can be reliably estimated. c) Prepare the journal entries for 2019, 2020, and 2021 financial year, assuming that the measure of progress on the contract cannot be reliably assessed.
Big Construction Company signs a contract on 1 July 2019, agreeing to build a warehouse for Buyer
Corporation Ltd at a fixed contract price of $10 million. Buyer Ltd will be in control of the asset
throughout the construction process. Big Construction Company estimates that construction costs will
be as follows:
2019 2.5 million
2020 $4 million
2021 $1.5 million
The contract provides that Buyer Corporation Ltd will make payments on 31 December each year as
follows:
2019 $2 million
2020 $5 million
2021 $3 million
The contract is completed and accepted on 31 December 2021. Assume that actual costs and cash
collections coincide with expectations and that cost (an input measure) is used as the basis for
assessing progress on the construction contract. Big Construction Company has a financial year ending
31 December.
Required:
a) Using the above data, compute the gross profit to be recognized for each of the three years,
assuming that the outcome of the contract can be reliably estimated.
b) Prepare the
assumption that the measure of progress on the contract can be reliably estimated.
c) Prepare the journal entries for 2019, 2020, and 2021 financial year, assuming that the measure of
progress on the contract cannot be reliably assessed.
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