7-1

Construction Accounting

Chapter 7Illustrated Solution: Problem 7-32Illustrated Solution: Problem 7-32

7-2

Billings and CollectionsBillings and Collections

Billings and Collections do not match up (exactly) with Revenues and Expenses during the construction period.

Construction-In-Process: Think of this account as an inventory account like Work-In-Process. This account will hold our expenditures and our profit during the construction period.

Progress Billings: This account is like a contra-inventory account that offsets Construction-In-Process on the Balance Sheet.

7-3

Part 1Part 1

A = L + OECash Construction in

Progress

Accounts Receivable

Progress Billings on Construction Contracts

Cost of Long-Term Construction

Revenue from Long-Term Contracts

7-4

Part 1Part 1

Cash Construction in Progress

Accounts Receivable

Progress Billings on Construction Contracts

Cost of Long-Term Construction

Revenue from Long-Term Contracts

4,600,000

4,600,000

A = L + OE

7-5

Part 1Part 1

Cash Construction in Progress

Accounts Receivable

Progress Billings on Construction Contracts

Cost of Long-Term Construction

Revenue from Long-Term Contracts

4,600,000

4,600,000

2 5,000,000 2 5,000,000

A = L + OE

7-6

Part 1Part 1

Cash Construction in Progress

Accounts Receivable

Progress Billings on Construction Contracts

Cost of Long-Term Construction

Revenue from Long-Term Contracts

4,600,000

3 4,500,000 4,600,000

2 5,000,000

3 4,500,000

2 5,000,000

A = L + OE

7-7

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000

7-8

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400

7-9

Part 1Part 1

Cash Construction in Progress

Accounts Receivable

Progress Billings on Construction Contracts

Cost of Long-Term Construction

Revenue from Long-Term Contracts

4,600,000

3 4,500,000 4,600,000

4 4,414,400 4 4,960,000

2 5,000,000

3 4,500,000

2 5,000,000

A = L + OE

7-10

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400 Gross profit…………………………………… 545,600

7-11

Part 1Part 1

Cash Construction in Progress

Accounts Receivable

Progress Billings on Construction Contracts

Cost of Long-Term Construction

Revenue from Long-Term Contracts

4,600,000

3 4,500,000 4,600,000

4 545,600

4 4,414,400 4 4,960,000

2 5,000,000

3 4,500,000

2 5,000,000

A = L + OE

7-12

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400 Gross profit…………………………………… 545,600

7-13

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date

Recognized in Prior Years

Recognized in Current

Year2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000 -- 4,906,000 Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400 -- 4,414,400 Gross profit…………………………………… 545,600 -- 545,600

7-14

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date

Recognized in Prior Years

Recognized in Current

Year2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000 -- 4,906,000 Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400 -- 4,414,400 Gross profit…………………………………… 545,600 -- 545,600

2002

Recognized revenue ($16,000,000 x .58)…. 9,280,000

7-15

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date

Recognized in Prior Years

Recognized in Current

Year2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000 -- 4,906,000 Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400 -- 4,414,400 Gross profit…………………………………… 545,600 -- 545,600

2002

Recognized revenue ($16,000,000 x .58)…. 9,280,000 Cost [($4,600,000 + $4,500,000 + $5,100,000) x .58]…………………………… 8,236,000 Gross profit………………………………….. 1,044,000

7-16

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date

Recognized in Prior Years

Recognized in Current

Year2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000 -- 4,906,000 Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400 -- 4,414,400 Gross profit…………………………………… 545,600 -- 545,600

2002

Recognized revenue ($16,000,000 x .58)…. 9,280,000 4,960,000 Cost [($4,600,000 + $4,500,000 + $5,100,000) x .58]…………………………… 8,236,000 4,414,400 Gross profit………………………………….. 1,044,000 545,600

{

7-17

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date

Recognized in Prior Years

Recognized in Current

Year2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000 -- 4,906,000 Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400 -- 4,414,400 Gross profit…………………………………… 545,600 -- 545,600

2002

Recognized revenue ($16,000,000 x .58)…. 9,280,000 4,960,000 4,320,000 Cost [($4,600,000 + $4,500,000 + $5,100,000) x .58]…………………………… 8,236,000 4,414,400 3,821,600 Gross profit………………………………….. 1,044,000 545,600 498,400

7-18

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date

Recognized in Prior Years

Recognized in Current

Year2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000 -- 4,906,000 Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400 -- 4,414,400 Gross profit…………………………………… 545,600 -- 545,600

2002

Recognized revenue ($16,000,000 x .58)…. 9,280,000 4,960,000 4,320,000 Cost [($4,600,000 + $4,500,000 + $5,100,000) x .58]…………………………… 8,236,000 4,414,400 3,821,600 Gross profit………………………………….. 1,044,000 545,600 498,400

2003

Recognized revenue………………………… 16,000,000 Cost (actual cost)……………………………. 14,350,000 Gross profit…………………………………… 1,650,000

7-19

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

To Date

Recognized in Prior Years

Recognized in Current

Year2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000 -- 4,906,000 Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400 -- 4,414,400 Gross profit…………………………………… 545,600 -- 545,600

2002

Recognized revenue ($16,000,000 x .58)…. 9,280,000 4,960,000 4,320,000 Cost [($4,600,000 + $4,500,000 + $5,100,000) x .58]…………………………… 8,236,000 4,414,400 3,821,600 Gross profit………………………………….. 1,044,000 545,600 498,400

2003

Recognized revenue………………………… 16,000,000 9,280,000 Cost (actual cost)……………………………. 14,350,000 8,236,000 Gross profit…………………………………… 1,650,000 1,044,000

7-20

To Date

Recognized in Prior Years

Recognized in Current

Year2001

Recognized revenue ($16,000,000 x .31)….. 4,960,000 -- 4,906,000 Cost [($4,600,000 + $9,640,000) x .31]……. 4,414,400 -- 4,414,400 Gross profit…………………………………… 545,600 -- 545,600

2002

Recognized revenue ($16,000,000 x .58)…. 9,280,000 4,960,000 4,320,000 Cost [($4,600,000 + $4,500,000 + $5,100,000) x .58]…………………………… 8,236,000 4,414,400 3,821,600 Gross profit………………………………….. 1,044,000 545,600 498,400

2003

Recognized revenue………………………… 16,000,000 9,280,000 6,720,000 Cost (actual cost)……………………………. 14,350,000 8,236,000 6,114,000 Gross profit…………………………………… 1,650,000 1,044,000 606,000

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

Costs and Estimated EarningsIn Excess of Billings and Billings in Excess of

Costs and Estimated EarningsUnder the Percentage-of-Completion Method

7-21

Part 2Part 2

Construction in Progress……… 4,600,000Materials, Labor, Cash, etc. 4,600,000

Accounts Receivable…………. 5,000,000Progress Billings on Construction Contracts…. 5,000,000

Cash……………………………. 4,500,000Accounts Receivable…….. 4,500,000

Cost of Long-Term Construction Contracts…….. 4,414,400Construction in Progress……. 545,600

Revenue From Long-Term Construction Contracts… 4,960,000

2001

7-22

Part 2Part 2

Construction in Progress……… 4,600,000 4,500,000 5,250,000Materials, Labor, Cash, etc. 4,600,000 4,500,000 5,250,000

Accounts Receivable…………. 5,000,000 6,000,000 5,000,000Progress Billings on Construction Contracts…. 5,000,000 6,100,000 5,000,000

Cash……………………………. 4,500,000 5,400,000 6,100,000Accounts Receivable…….. 4,500,000 5,400,000 6,100,000

Cost of Long-Term Construction Contracts…….. 4,414,400 3,821,600 6,114,000Construction in Progress……. 545,600 498,400 606,000

Revenue From Long-Term Construction Contracts… 4,960,000 4,320,000 6,720,000

2001 2002 2003

7-23

Part 2Part 2

Construction in Progress……… 4,600,000 4,500,000 5,250,000Materials, Labor, Cash, etc. 4,600,000 4,500,000 5,250,000

Accounts Receivable…………. 5,000,000 6,000,000 5,000,000Progress Billings on Construction Contracts…. 5,000,000 6,100,000 5,000,000

Cash……………………………. 4,500,000 5,400,000 6,100,000Accounts Receivable…….. 4,500,000 5,400,000 6,100,000

Cost of Long-Term Construction Contracts…….. 4,414,400 3,821,600 6,114,000Construction in Progress……. 545,600 498,400 606,000

Revenue From Long-Term Construction Contracts… 4,960,000 4,320,000 6,720,000

Progress Billings on Construction Contracts……… 16,000,000

Construction in Progress… No entry No entry 16,000,000

2001 2002 2003

7-24

Part 3Part 3

Construction in Progress………………………… 5,250,000Materials, Labor, Cash, etc…………………. 5,250,000

Accounts Receivable…………………………….. 5,000,000Progress Billings on Construction

Contracts……………………………………. 5,000,000

Cash……………………………………………….. 6,100,000Accounts Receivable……………………….. 6,100,000

2003

7-25

Part 3Part 3

Construction in Progress………………………… 5,250,000Materials, Labor, Cash, etc…………………. 5,250,000

Accounts Receivable…………………………….. 5,000,000Progress Billings on Construction

Contracts……………………………………. 5,000,000

Cash……………………………………………….. 6,100,000Accounts Receivable……………………….. 6,100,000

Cost of Long-Term Construction Contracts……. 14,350,000Construction in Progress……………………. 14,350,000

Progress Billings on Construction Contracts….. 16,000,000Revenue From Long-Term Construction

Contracts…………………………………… 16,000,000

2003

7-26

Part 4Part 4

Cost of Long-Term Construction Contracts…….. 4,600,000 4,500,000 5,250,000

2001 2002 2003

The following entry would be the only one different from Part (2):

7-27

Part 4Part 4

Cost of Long-Term Construction Contracts…….. 4,600,000 4,500,000 5,250,000Construction in Progress……. 545,600 498,400 606,000

2001 2002 2003

The following entry would be the only one different from Part (2):

7-28

Part 4Part 4

Cost of Long-Term Construction Contracts…….. 4,600,000 4,500,000 5,250,000Construction in Progress……. 545,600 498,400 606,000

Revenue From Long-Term Construction Contracts… 5,145,600 4,998,400 5,856,000

2001 2002 2003

The following entry would be the only one different from Part (2):

7-29

End of ProblemEnd of Problem