Accountancy 422
Long Term Construction Contract
Supplemental Problem Solution
a. Calculation of revenue.
Year 1 Revenue = ($10,500,000 ÷ $42,000,000 * $50,000,000) – $0 = $12,500,000
Year 2 Revenue = ($33,000,000 ÷ $44,000,000 * $50,000,000) – $12,500,000
= $25,000,000
Year 3 Revenue = ($44,000,000 ÷ $44,000,000 * 50,000,000) - $37,500,000
= $12,500,000
b. Calculation of account balances:
Billings recorded in Year 1 $10,000,000
Revenues recognized in Year 1 – $12,500,000
Costs and profits in excess of billings, Year 1 $ 2,500,000
Billings recorded in Year 2 $20,000,000
Revenue recognized in Year 2 – 25,000,000
Costs and profits in excess of billings for Year 2 5,000,000
Beginning balance of Costs and profits in excess of billings 2,500,000
Ending Year 2 balance of Costs and Profits in excess of billings $ 7,500,000
c. Journal entries for year 2:
Construction expenses $22,500,000
Cash $22,500,000
To record costs as incurred
Accounts receivable $20,000,000
Construction revenue $20,000,000
To record billings to customers
Cash $20,000,000
Accounts receivable $20,000,000
To record collections from customers.
Costs and profits in excess of billings $5,000,000
Construction revenue $5,000,000
To adjust revenue account.
