Refer to the data in problem P3-7 for Jensen Construction Company. Assume Jensen uses the percentage-of-completion method of accounting for this project.
Required:
Prepare the journal entry that Jensen would make at the end of 2015 and 2016 to appropriately recognize the revenue, expense, and profit (loss) on the project for these two years if the estimated costs to complete the project were $3,045,000 instead of $1,645,000 as of the end of 2015 as previously estimated. Assume that during 2016 actual costs incurred were as previously estimated (i.e., $3,045,000) at the end of 2015.
SOLUTION
| 2014 | 2015 | 2016 | |
|---|---|---|---|
| Actual construction costs incurred during the year | $ 1,800,000 | $ 1,255,000 | $ 3,045,000 |
| Actual construction costs incurred in prior years | 1,800,000 | 3,055,000 | |
| Cumulative actual construction costs | 1,800,000 | 3,055,000 | 6,100,000 |
| Estimated costs to complete at end of year | $ 2,700,000 | $ 3,045,000 | $ - |
| Total construction costs | 4,500,000 | 6,100,000 | 6,100,000 |
| Billings made over the course of the year | $ 1,750,000 | $ 1,800,000 | $ 2,450,000 |
| Cash collections during the year | 1,700,000 | 1,600,000 | 2,700,000 |
| Percentage complete (actual costs ÷ estimated total construction costs) (A) | 40.0% | 50.1% | 100.0% |
| Estimated profit (contract price - total estimated construction costs) (B) | $ 1,500,000 | $ (100,000) | $ (100,000) |
| Profits earned to date (C = A x B) | $ 600,000 | $ (100,000) | $ (100,000) |
| Profit recognized in current year (C − Profit previously recognized) | $ 600,000 | $ (700,000) | $ - |
Jensen Construction Company
Computation of Recognizable Profit/Loss
Percentage of Completion Method
Total Estimated Loss in 2015 = $100,000
2014
Costs to date (12/31/11) $1,800,000
Estimated costs to complete 2,700,000
Estimated total costs $4,500,000
Percent complete ($1,800,000 $4,500,000) 40%
Revenue recognized ($6,000,000 x 40%) $2,400,000
Costs recognized ($4,500,000 x 40%) (1,800,000)
Gross profit recognized in 2014 (40% x $1,500,000) $ 600,000
2015
Costs to date (12/31/15) ($1,800,000 + $1,255,000) $3,055,000
Estimated costs to complete 3,045,000
Estimated total costs $6,100,000
Percent complete ($3,055,000 $6,100,000) 50.1%
Unlock the complete assignment
You are viewing the free preview. Purchase this assignment once to reveal the complete resource.
Secure checkout is completed by Stripe.