On March 1, 2019, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,400,000. The building was completed by November 30, 2021. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2019, 2020 and 2021 are given below. 2019 2020 2021 Contract costs incurred during the year $2,880,000 $2,595,000 $1,825,000| Estimated costs to complete the contract at 12/31 3,520,000 1,825,000 -0- Billings to Fabrik during the year 3,200,000 4,000,000 1,200,000| Cash collected during the year 2,500,000 4,000,000 1,900,000| Instructions a. Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract and all the necessary journal entries for the years ended December 31, 2019, 2020, and 2021.

On March 1, 2019, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,400,000. The building was completed by November 30, 2021. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2019, 2020 and 2021 are given below. 2019 2020 2021 Contract costs incurred during the year $2,880,000 $2,595,000 $1,825,000| Estimated costs to complete the contract at 12/31 3,520,000 1,825,000 -0- Billings to Fabrik during the year 3,200,000 4,000,000 1,200,000| Cash collected during the year 2,500,000 4,000,000 1,900,000| Instructions a. Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract and all the necessary journal entries for the years ended December 31, 2019, 2020, and 2021.

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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Concept explainers

Contract Costing

Contract costing is about tracing particular costs related to a particular contract entered into with the customer. It is one of the forms of job order costing. It is useful in long-term contracts at the most. It is seen that substantial time is required for the completion of the contract which takes different accounting periods. Thus, it is very much helpful for recognizing the costs associated with it and accounting in their specific accounting periods.

Question

Using the percentage-of-completion method, prepare schedules to compute the
profit or loss to be recognized as a result of this contract and all the necessary
journal entries

On March 1, 2019, Pechstein Construction Company contracted to construct a
factory building for Fabrik Manufacturing Inc. for a total contract price of
$8,400,000. The building was completed by November 30, 2021. The annual
contract costs incurred, estimated costs to complete the contract, and accumulated
billings to Fabrik for 2019, 2020 and 2021 are given below.
2019
2020
2021
Contract costs incurred during the year
$2,880,000 S2,595,000 $1,825,000
Estimated costs to complete the contract at 12/31 3,520,000 1,825,000
-0-
Billings to Fabrik during the year
3,200,000 4,000,000 1,200,000
Cash collected during the year
2,500,000 4,000,000 1,900,000
Instructions
a. Using the percentage-of-completion method, prepare schedules to compute the
profit or loss to be recognized as a result of this contract and all the necessary
journal entries for the years ended December 31, 2019, 2020, and 2021.
b. Using the cost-recovery method, prepare schedules to compute the profit or loss to
be recognized as a result of this contract all the necessary journal entries to record
the costs, expenses and revenue for the years ended December 31, 2019, 2020, and
2021. (Journal entries for billings and collection are not required.)

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