Chapter 17, Problem 7P

1.

To determine

Journalize entries for three years.

Explanation of Solution

Contract:

Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be written, oral or implied by ordinary business practices.

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare journal entries:

Date	Account titles and Explanation	Debit ($)	Credit ($)
2017	Construction in progress	150,000
	Accounts payable (inventory, cash, etc)		150,000
	(To record costs of construction)
	Accounts receivable	120,000
	Partial billings		120,000
	(To record partial billings)
	Cash	100,000
	Accounts receivable		100,000
	(To record collections)
	Construction expense [Refer to table (2)]	150,000
	Construction in progress [Refer to table (2)]	60,000
	Construction revenue [Refer to table (2)]		210,000
	(To record gross profit recognized)
2018	Construction in progress	242,000
	Accounts payable (inventory, cash, etc)		242,000
	(To record costs of construction)
	Accounts receivable	250,000
	Partial billings		250,000
	(To record partial billings)
	Cash	260,000
	Accounts receivable		260,000
	(To record collections)
	Construction expense [Refer to table (2)]	242,000
	Construction in progress [Refer to table (2)]	38,000
	Construction revenue [Refer to table (2)]		280,000
	(To record gross profit recognized)
2019	Construction in progress	168,000
	Accounts payable (inventory, cash, etc)		168,000
	(To record costs of construction)
	Accounts receivable	330,000
	Partial billings		330,000
	(To record partial billings)
	Cash	340,000
	Accounts receivable		340,000
	(To record collections)
	Construction expense [Refer to table (2)]	168,000
	Construction in progress [Refer to table (2)]	42,000
	Construction revenue [Refer to table (2)]		210,000
	(To record gross profit recognized)
	Partial billings	700,000
	Construction in progress		700,000
	(To close out construction accounts)

Table (1)

Working notes:

(1)Calculate the gross profit recognition:

Particulars	2017	2018	2019
Construction costs incurred during the year	$150,000	$392,000 (2)	$560,000 (3)
Estimated costs to compete	$350,000	$168,000
Total estimated costs	$500,000	$560,000	$560,000
Percent complete $\left(\begin{array}{l}\text{Construction costs incurred to date}\\ \text{ ÷ total estimated costs}\end{array}\right)$	30%	70%	100%
Revenue recognized during the year $\left(\text{ Percent complete× contract price of \$700,000}\right)$	210,000	280,000	210,000
Construction cost incurred for the year	150,000	242,000	168,000
Gross profit recognized	60,000	38,000	42,000

Table (2)

(2)Calculate the amount of construction costs incurred during the year 2018:

$\begin{array}{c}\begin{array}{l}\text{Construction}\text{costs}\\ \text{incurred}\text{during}\text{2018}\end{array}\}\text{=}\left(\begin{array}{l}\text{Construction}\text{cost}\text{during}\text{2017}\text{+}\text{Previously}\\ \text{incurred}\text{constrcution}\text{costs}\text{during}\text{2018}\end{array}\right)\\ \text{=}\text{\$150,000+\$}\text{242,000}\\ \text{=\$392,000}\end{array}$

(3)Calculate the amount of construction costs incurred during the year 2019:    

$\begin{array}{c}\begin{array}{l}\text{Construction}\text{costs}\\ \text{incurred}\text{during}\text{2019}\end{array}\}\text{=}\left(\begin{array}{l}\text{Construction}\text{cost}\text{during}\text{2018}\text{+}\text{Previously}\\ \text{incurred}\text{constrcution}\text{costs}\text{during}\text{2019}\end{array}\right)\\ \text{=}\text{\$392,000+\$}168,000\\ \text{=\$560,000}\end{array}$

2.

To determine

Journalize entries assuming that the contract represents a single performance obligation.

Explanation of Solution

Single performance obligation: In single performance obligation, the transaction price is associated to the performance obligation and no allocation is needed.

Prepare journal entries:

Date	Account titles and Explanation	Debit ($)	Credit ($)
2017	Construction in progress	150,000
	Accounts payable (inventory, cash, etc)		150,000
	(To record costs of construction)
	Accounts receivable	120,000
	Partial billings		120,000
	(To record partial billings)
	Cash	100,000
	Accounts receivable		100,000
	(To record collections)
2018	Construction in progress	242,000
	Accounts payable (inventory, cash, etc)		242,000
	(To record costs of construction)
	Accounts receivable	250,000
	Partial billings		250,000
	(To record partial billings)
	Cash	260,000
	Accounts receivable		260,000
	(To record collections)
2019	Construction in progress	168,000
	Accounts payable (inventory, cash, etc)		168,000
	(To record costs of construction)
	Accounts receivable	330,000
	Partial billings		330,000
	(To record partial billings)
	Cash	340,000
	Accounts receivable		340,000
	(To record collections)
	Partial billings Construction revenue	700,000
	Construction revenue		700,000
	(To record revenue at completion)
	Construction expense (3)	560,000
	Construction in progress		560,000
	(To recognize expense at completion)

Table (3)