Long Term Construction Contracts

Question 1

Computation of Construction in Progress

Answer 1

CIP account is only debited for:

Construction expenses PLUS
Current Year Profit

Question 2

Computation of Current Year Contract Costs

Answer 2

= % of completion x total estimated costs
or
Construction in Progress - Profit

Question 3

% of Completion =

Answer 3

current year costs/total estimated costs to complete

Question 4

Deferred Gross Profit =

Answer 4

% of completion x Gross Profit

Question 5

Realized Gross Profit =

Answer 5

Collection x % of completion

Question 6

In both Completed Contract and % of Completion Methods, how do you account for current year losses?

Answer 6

losses are recognized immediately in full in the year incurred

Loss = Estimated GP - Current year costs

Question 7

In completed contract method, how do you account for the current year’s deferred profit?

Answer 7

NO. Do not recognize profit until the construction is 100% complete.
Only recognize losses for the current year.

Question 8

In % of completion method, what is the entry to record current year construction expenses?

Answer 8

Construction in Progress

Cash

Question 9

In % of completion method, what is the entry to record current year profit?

Answer 9

Construction Expenses
Construction in Progress - Realized GP
Construction Revenue

Construction Revenue = Contract price x % of completion
Construction in progress = % of completion x estimated gross profit

Question 10

Closing Entry for % of completion

Answer 10

Billings on LT Contracts

Construction in Progress

Question 11

Closing entry for completed contract method

Answer 11

Construction Expenses
Construction in Progress
Billings on LT contracts
Construction Revenue

Question 12

% OF COMPLETION METHOD

JOURNAL ENTRIES

Answer 12

Construction in Progress
      Cash
              #construction expenses

Accounts Receivable
Billings on LT contracts
#billings

Cash
A/R
#collection

Construction in Progress (realized GP)
Construction Expenses (CY expenses)
       Construction Revenue (%of completion x  
                               contract price)

Billings on LT contracts
     Construction in progress
           #closing entry

Question 13

COMPLETED CONTRACT METHOD

JOURNAL ENTRIES

Answer 13

Construction in progress
     Cash
             #construction expenses
A/R
     Billings on LT contracts
Cash
      A/R

END OF YEAR PROFIT RECOGNITION
NO ENTRY

Upon completion of contract:

Construction expenses
Construction in progress

Billings on LT contracts
Construction revenue

Question 14

Classification of Billings on LT contracts in the BS

Answer 14

treated like an unearned revenue
current liability

presented as deduction from Construction in progress account - current asset in the BS

Question 15

In % of completion, computation of total loss to be recognized if profit was realized in the prior year

JOURNAL ENTRY

Answer 15

Total revenue
Less: total estimated costs
= Loss
\+ Previously recognized profit
= Loss to be recognized for the CY

Loss on uncompleted LT contracts
Construction in progress

Question 16

In the completed contract method, computation of loss to be recognized for the year is

Answer 16

Total revenue
Less: Total estimated costs
= Loss

Loss on uncompleted LT contracts
Construction in progress

NOTE! NOT PRIOR YEAR REALIZED PROFIT RECOGNIZED IN COMPLETED CONTRACT METHOD!!!