Chapter 5, Problem 5.11P

Long-term contract; revenue recognition upon completion

• LO5–9

[This is a variation of P 5–10 modified to focus on revenue recognition upon project completion.]

Required:

Complete the requirements of P 5–10 assuming that Westgate Construction’s contract with Santa Clara County does not qualify for revenue recognition over time.

To determine

Contract

Contract is a written document that creates legal enforcement for buying and selling the property. It is committed by the parties to performing their obligation and enforcing their rights.

Revenue recognized point of long term contract

A long-term contract qualifies for revenue recognition over time. The seller can recognize the revenue as per percentage of the completion of the project, which is recognized by revenue mines cost of completion until date.

A contract does not meet the performance obligation norm. The seller cannot recognize the revenue till the project complete.

The revenue recognition principle

The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.

To describe: The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020.

Explanation of Solution

The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020 are as follows:

Year	Revenue recognized	Gross profit (loss)
2018	$0	$0
2019	$0	$0
2020	$10,000,000	$1,800,000
Total	$10,000,000	$1,800,000

Table (1)

Therefore, the amount of revenue in the year 2018, 2019, and 2020 is $0, $0, and $10,000,000 respectively, and gross profit in the year 2018, 2019, and 2020 is $0, $0, and $1,800,000 respectively.

To determine

To prepare: The journal entries for the year 2018, 2019 and 2020.

Explanation of Solution

In the year 2018:

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Construction in progress		$2,400,000
	Various accounts			$2,400,000
	(To record construction cost)

Table (2)

• Construction in progress is an asset. There is an increase in asset value. Therefore, it is debited.
• Various accounts are revenue. There is an increase in liability value. Therefore, it is credited.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Account receivable		$2,000,000
	Billings on construction contract			$2,000,000
	(To record progress billings)

Table (3)

• Account receivable is an asset. There is an increase in asset value. Therefore, it is debited.
• Billings on construction contract is revenue. There is a decrease in liability value. Therefore, it is debited.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Cash		$1,800,000
	Account receivable			$1,800,000
	(To record cash collection)

Table (4)

• Cash is an asset. There is an increase in asset value. Therefore, it is debited.
• Account receivable is an asset. There is a decrease in asset value. Therefore, it is credited.

In the year 2019:

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Construction in progress		$3,600,000
	Various accounts			$3,600,000
	(To record construction cost)

Table (5)

• Construction in progress is an asset. There is an increase in asset value. Therefore, it is debited.
• Various accounts are revenue. There is an increase in liability value. Therefore, it is credited.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Account receivable		$4,000,000
	Billings on construction contract			$4,000,000
	(To record progress billings)

Table (6)

• Account receivable is an asset. There is an increase in asset value. Therefore, it is debited.
• Billings on construction contract is revenue. There is a decrease in liability value. Therefore, it is debited.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Cash		$3,600,000
	Account receivable			$3,600,000
	(To record cash collection)

Table (7)

• Cash is an asset. There is an increase in asset value. Therefore, it is debited.
• Account receivable is an asset. There is a decrease in asset value. Therefore, it is credited.

In the year 2020:

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Construction in progress		$2,200,000
	Various accounts			$2,200,000
	(To record construction cost)

Table (8)

• Construction in progress is an asset. There is an increase in asset value. Therefore, it is debited.
• Various accounts are revenue. There is an increase in liability value. Therefore, it is credited.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Account receivable		$4,000,000
	Billings on construction contract			$4,000,000
	(To record progress billings)

Table (9)

• Account receivable is an asset. There is an increase in asset value. Therefore, it is debited.
• Billings on construction contract is revenue. There is a decrease in liability value. Therefore, it is debited.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Cash		$4,600,000
	Account receivable			$4,600,000
	(To record cash collection)

Table (10)

• Cash is an asset. There is an increase in asset value. Therefore, it is debited.
• Account receivable is an asset. There is a decrease in asset value. Therefore, it is credited.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Construction in progress		$1,800,000
	Cost of construction		$8,200,000
	Revenue from long-term contracts			$10,000,000
	(To record gross profit)

Table (11)

• Construction in progress is an asset. There is an increase in asset value. Therefore, it is debited.
• Cost of construction is an expense. There is a decrease in liability value. Therefore, it is debited.
• Revenue from long-term contracts is revenue. There is an increase in liability value. Therefore, it is credited.

To determine

To prepare: The partial balance sheet for 2018 and 2019.

Explanation of Solution

Partial balance sheet of W Construction Company is as follows:

In the year 2018:

Assets	2018
Account receivables		$200,000
Construction in progress	$2,400,000
Less: Billings	($2,000,000)
Costs in excess of billings		$400,000

Table (12)

In the year 2019:

Assets	2019
Account receivables		$600,000
Construction in progress	$7,500,000
Less: Billings	($6,000,000)
Costs in excess of billings		$1,500,000

Table (13)

To determine

The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020.

Explanation of Solution

Given,

Particulars	2018	2019	2020
Costs incurred during the year	$2,400,000	$3,800,000	$3,200,000
Estimated costs to complete as of year-end	$5,600,000	$3,100,000

The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020 are as follows: (refer Requirement 3)

Year	Revenue recognized	Gross profit (loss)
2018	$0	$0
2019	$0	$0
2020	$10,000,000	$600,000
Total	$10,000,000	$600,000

Table (14)

Therefore, the amount of revenue in the year 2018, 2019, and 2020 is $0, $0, and $10,000,000 respectively, and gross profit in the year 2018, 2019, and 2020 is $0, $0, and $600,000 respectively.

To determine

The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020.

Explanation of Solution

Given,

Particulars	2018	2019	2020
Costs incurred during the year	$2,400,000	$3,800,000	$3,900,000
Estimated costs to complete as of year-end	$5,600,000	$4,100,000

The amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020 are as follows:

Year	Revenue recognized	Gross profit (loss)
2018	$0	$0
2019	$0	($300,000)
2020	$10,000,000	$200,000
Total	$10,000,000	($100,000)

Table (15)

Therefore, the amount of revenue in the year 2018, 2019, and 2020 is $0, $0, and $10,000,000 respectively, and gross profit in the year 2018, 2019, and 2020 is $0, ($300,000), and $200,000 respectively.