E3-2. Determining gross profit using percentage-of-completion
The gross profit for the percentage-of-completion method is as follows:
Contract price
Cost to date
Est. cost to complete
Total cost
Expected gross profit
Percentage complete (18/24)
Profit to recognize date
Profit previously recognized
2012 gross profit
$3,000,000
$1,800,000
600,000
2,400,000
600,000
75%
450,000
(300,000)
$ 150,000
E3-12. Franchise sales; revenue recognition
Requirement 1:
April 1, 2011 To record franchise agreement and down payment
DR Cash
$60,000
DR Note receivable
240,000
CR Unearned franchise fee revenue
$300,000
Requirement 2:
August 15, 2011 To recognize franchise fee revenue
DR Unearned franchise fee revenue
$300,000
CR Franchise fee revenue
$300,000
P3-4. Income recognition on long-term contracts.
Requirement 1:
a. No income will be recognized in 2011 under the completed-contract method
as the project is not complete.
b.
Income for 2011
=
=
$8,000,000
$24,000,000
.33
x
1
x ($30,000,000 – $24,000,000)
$6,000,000 = $2,000,000
Note: Materials purchased but not used are not included in the numerator of the cost
percentage for 2011 but are included in the estimated total project costs ($8,000,000
+ $15,500,000 + $500,000).
Requirement 2:
DR Construction in progress
DR Material inventory
CR Cash
Percentage of completion
$8,000,000
500,000
$8,500,000
DR Accounts receivable
CR Billings on contract
$9,000,000
DR Cash
CR Accounts receivable
$7,500,000
DR Construction in progress
DR Construction expenses
CR Construction revenue
$2,000,000
8,000,000
Completed
contract
(same)
(same)
$9,000,000
(same)
$7,500,000
(No entry)
$10,000,000
P3-5. Long-term construction contract accounting
(AICPA adapted)
Completed-Contract Method
Year 2011
DR Construction in progress
CR Cash, payables, materials, etc.
$290,000
$290,000
DR Accounts receivable
CR Billings on contract
$260,000
DR Cash
CR Accounts receivable
$240,000
$260,000
$240,000
Since the project is incomplete, no revenue is recognized for the year
2011.
2
Balance Sheet Presentation at the End of 2011
Completed-Contract Method
Current Assets:
Construction in progress
$290,000
Less: Billings on contract
(260,000)
Unbilled costs of construction
$30,000
Accounts receivable
$20,000
Year 2012
DR Construction in progress
CR Cash, payables, materials, etc.
$150,000
$150,000
DR Accounts receivable
CR Billings on contract
$265,000
DR Cash
CR Accounts receivable
$285,000
DR Billings on contract
CR Construction in progress
CR Income on long-term
construction contracts
$525,000
$265,000
$285,000
$440,000
85,000
Alternate entry:
DR Construction expense
DR Billings on contract
CR Construction in progress
CR Construction revenue
$440,000
525,000
$440,000
525,000
Percentage-of-Completion Method
Year 2011
DR Construction in progress
CR Cash, payables, materials, etc.
$290,000
$290,000
DR Accounts receivable
CR Billings on contract
$260,000
DR Cash
CR Accounts receivable
$240,000
$260,000
$240,000
DR Construction in progress1
CR Income on long-term
construction contracts
$60,000
$60,000
3
Alternate entry:
DR Construction in progress1
DR Construction expense
CR Construction revenue
$ 60,000
290,000
$350,000
1
Contract price
- Actual costs to date
- Estimated costs to complete
Total estimated costs of project
Estimated total gross margin
$525,000
($290,000)
(145,000)
(435,000)
$90,000
Revenue earned during the period: ($290,000/$435,000) x $525,000 = $350,000
Gross margin earned during the period: ($290,000/$435,000) x $90,000 = $60,000
Balance Sheet Presentation at the End of 2011
Percentage-of-Completion Method
Current Assets:
Construction in progress
$350,000
Less: Billings on contract
(260,000)
Unbilled costs of construction
$90,000
Accounts receivable
$20,000
Year 2012
DR Construction in progress
CR Cash, payables, materials, etc.
$150,000
$150,000
DR Accounts receivable
CR Billings on contract
$265,000
DR Cash
CR Accounts receivable
$285,000
$265,000
$285,000
DR Construction in progress
CR Income on long-term
construction contracts
$25,000
$25,000
Alternate Entry:
DR Construction in progress
DR Construction expense
$ 25,000
150,000
4
CR Construction revenue
$175,000
Total
2011
Construction revenue
$525,000
$350,000
Construction expense
(440,000)
(290,000)
Gross margin
$ 85,000
$ 60,000
P3-6. Determining income under installment sales method
(AICPA adapted)
2012
$175,000
(150,000)
$ 25,000
Income before income taxes on installment sale contract:
Sales
Cost of sales
Gross profit
$556,000
(417,000)
139,000
Interest income (from following calculations)
Income before income taxes
27,360
$166,360
Calculations to determine interest income on installment sale contract:
Cash selling price
Less: July 1, 2011, payment
Interest rate
Annual interest
Interest July 1, 2011, to December 31, 2011
($54,720 x 1/2)
5
$556,000
(100,000)
456,000
12%
$ 54,720
$ 27,360