Chapter 5, Problem 5.22P

Requirement – 1

To determine

International Financial Reporting Standards

They are commonly known as IFRS. These are set of accounting standards which are developed by independent (Non-profit) organization called as International Accounting Standards Board (IASB). These are universally accepted set of standards which state the rules and standards for accounting at global level.

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 as revenue minus cost of completion until date.

If a contract does not meet the performance obligation norm, then the seller cannot recognize the revenue till the project is 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.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To determine: The amount of gross profit or loss to be recognized in 2016, 2017, and 2018.

Explanation of Solution

Here,

2016 gross profit recognized is $0

2017 gross profit recognized is $0

2018 gross profit recognized is $1,800,000

Now, calculate the total gross profit:

$\begin{array}{c}\text{Total gross profit=}\left(\begin{array}{l}\text{2}0\text{16 gross profit recognized}\\ \text{+2}0\text{17 grossprofit recognized}\\ \text{+2}018\text{ gross profit recognized}\end{array}\right)\\ \text{=}\left(\$0+\$0+\$\text{1},\text{8}00,000\right)\\ \text{=}\$1,800,000\end{array}$                  

Hence, the calculated total gross profit is $1,800,000.

Requirement – 2

To determine

To prepare: The journal entries for the year 2016, 2017 and 2018.

Explanation of Solution

The journal entries for the year 2016, 2017 and 2018 are as follows:

In the year 2016:

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 (1)

• 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 value of stockholder’s equity. 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 (2)

• Account receivable is an asset. There is an increase in asset value. Therefore, it is debited.
• Billings on construction contract is revenue. There is an increase in value of stockholder’s equity. Therefore, it is credited.

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

Table (3)

• 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
	Cost of construction		$2,400,000
	Revenue from long-term contracts			$2,400,000
	(To record gross profit)

Table (4)

• Cost of construction is an expense. There is a decrease in stockholders’ equity value. Therefore, it is debited.
• Revenue from long-term contracts is revenue. There is an increase in stockholders’ equity value. Therefore, it is credited.

In the year 2017:

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 stockholders’ equity 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 an increase in stockholders’ equity value. Therefore, it is credited.

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.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Cost of construction		$3,600,000
	Revenue from long-term contracts			$3,600,000
	(To record gross profit)

Table (8)

• 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 stockholders’ equity value. Therefore, it is credited.

In the year 2018:

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 (9)

• 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 stockholders’ equity 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 (10)

• 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 stockholders equity value. Therefore, it is credited.

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

Table (11)

• 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		$2,400,000
	Revenue from long-term contracts			$4,000,000
	(To record gross profit)

Table (12)

• 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 stockholders’ equity value. Therefore, it is credited.

Conclusion

Therefore, the journal entries for the year 2016, 2017 and 2018 are recorded.

Requirement – 3

To determine

To prepare: The partial balance sheet for 2016 and 2017.

Explanation of Solution

Partial balance sheet of W Construction Company is as follows:

In the year 2016:

Assets	2016
Account receivables		$400,000
Construction in progress	$2,400,000
Less: Billings	($2,000,000)
Costs in excess of billings		$400,000

Table (13)

In the year 2017:

Assets	2017
Account receivables		$600,000
Construction in progress	$6,000,000
Less: Billings	($6,000,000)
Costs in excess of billings		$0

Table (14)

Requirement – 4

To determine

The total amount of gross profit or loss to be recognized in 2016, 2017, and 2018.

Explanation of Solution

Here,

2016 gross profit recognized is $0

2017 gross profit recognized is $0

2018 gross profit recognized is $600,000

Now, calculate the total gross profit:

$\begin{array}{c}\text{Total gross profit}=\left(\begin{array}{l}\text{2}0\text{16 gross profit recognized}+\\ \text{2}0\text{17 grossprofit recognized}+\\ \text{2}018\text{ gross profit recognized}\end{array}\right)\\ =\left(\$0+\$0+\$600,000\right)\\ =\$600,000\end{array}$                    

Hence, the calculated total gross profit is $600,000.

Note:

Details for cost incurred and estimated cost to complete.

Particulars	2016	2017	2018
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

Table (15)

Requirement – 5

To determine

The amount of revenue and gross profit or loss to be recognized in 2016, 2017, and 2018.

Explanation of Solution

Here,

2016 gross profit recognized is $0

2017 gross profit recognized is ($300,000)

2018 gross profit recognized is $200,000

Now, calculate the total gross profit:

$\begin{array}{c}\text{Total gross profit/(loss)}=\left(\begin{array}{l}\text{2}0\text{16 gross profit recognized}+\\ \text{2}0\text{17 grossprofit recognized}+\\ \text{2}0\text{18 gross profit recognized}\end{array}\right)\\ =\left(\$0+\left(\$300,000\right)+\$200,000\right)\\ =\left(\$100,000\right)\end{array}$                  

Hence, the calculated total gross loss is ($100,000).

Note:

Details for cost incurred and estimated cost to complete.

Particulars	2016	2017	2018
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

Table (16)