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: Using the above data, compute the gross profit to be recognised for each of the three years, assuming that the outcome of the contract can be reliably estimated. Prepare the journal entries for 2019, 2020 and 2021 financial year to recognise revenue on the assumption that the measure of progress on the contract can be reliably estimated. Prepare the journal entries for 2019, 2020 and 2021 financial year, assuming that the measure of progress on the contract cannot be reliably assessed.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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:

Using the above data, compute the gross profit to be recognised for each of the three years, assuming that the outcome of the contract can be reliably estimated.
Prepare the journal entries for 2019, 2020 and 2021 financial year to recognise revenue on the assumption that the measure of progress on the contract can be reliably estimated.
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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