Answer:
MSK Construction Company
a) Journal Entries:
Debit Contract Cost $290,000
Credit Cash Account $290,000
To record the cost of the contract incurred for the 1st year.
Debit Accounts Receivable $260,000
Debit Unbilled Contract $90,000
Credit Contract Revenue $350,000
To record the contract revenue for the first year.
Debit Cash Account $240,000
Credit Accounts Receivable $240,000
To record the receipt of cash for the first year.
Debit Contract Cost $150,000
Credit Cash Account $150,000
To record the cost of the contract incurred for the 2nd year.
Debit Accounts Receivable $265,000
Credit Contract Revenue $175,000
Credit Unbilled Contract $90,000
To record the contract revenue for the 2nd year.
Debit Cash Account $265,000
Credit Accounts Receivable $265,000
To record the receipt of cash for the 2nd year.
Explanation:
Contract price = $525,000
Contract data:
20X1 20X2
Costs incurred during the year $290,000 $150,000
Estimated additional cost to complete 145,000 —
Billings during the year 260,000 265,000
Cash collections during the year 240,000 285,000
Revenue Recognition over time based on costs:
Total estimated cost = $435,000 ($290,000 + 145,000)
Revenue in the 1st year = ($290,000/435,000 * $525,000) = $350,000
Revenue in the 2nd year = $175,000 ($525,000 - $350,000)
Revenue Recognition at point in time when control is transferred:
Revenue in the 1st year = $0
Revenue in the 2nd year = $525,000
