Question

Dobson Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost-to-cost basis. Dobson began work on a lump-sum contract at the beginning of 2018. As bid, the statistics were as follows:
Lump-sum price (contract price) $8,000,000
Estimated costs
Labor $1,700,000
Materials and subcontractor 3,500,000
Indirect costs 800,000 6,000,000
$2,000,000
At the end of the first year, the following was the status of the contract:
Billings to date $4,500,000
Costs incurred to date
Labor $928,000
Materials and subcontractor 1,296,000
Indirect costs 386,000 2,610,000
Latest forecast total cost 6,000,000
It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $210,000. These costs should not be considered in the costs incurred to date.
Instructions:
(a) Compute the percentage of completion on the contract at the end of 2018.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2018.
(c) Make the journal entry to record the income (loss) for 2018 on Dobson's books.
(d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of Dobson Construction at the end of 2018 related to its construction accounts. Also indicate where these items would be classified on the balance sheet. Billings collected during the year amounted to $3,800,000.
(e) Assume the latest forecast on total costs at the end of 2018 was $8,120,000. How much income (loss) would Dobson report for the year 2018?

Answer 1

Answer:

Dobson Construction

a) Percentage of completion = $2,400,000/$6,000,000 * 100

= 40%

b) Gross profit for 2018:

Contract Revenue based on 40% = $3,200,000

Costs incurred to date                        2,400,000

Gross profit                                          $800,000

c) Journal Entry to record the income:

Debit Accounts receivable $4,500,000

Credit Contract Revenue $3,200,000

Credit Unearned revenue $1,300,000

To record the contract revenue for the year.

Debit Cost of Contract $2,400,000

Debit Electrical and Mechanical Materials $210,000

Credit Cash $2,610,000

To record the contract cost incurred for the year.

Debit Cash $3,800,000

Credit Accounts receivable $3,800,000

To record the billings collected during the year.

d) Accounts and amounts on the Balance Sheet at the end of 2018:

Assets:

Accounts receivable       $700,000

Electrical Supplies              210,000

Cash                                 1,190,000

Liabilities:

Unearned income        $1,300,000

Income                              800,000

e) The loss that Dobson would report for the year 2018 is:

= $36,000.

Explanation:

a) Data and CAlculations:

Lump-sum price (contract price)                    $8,000,000

Estimated costs:

Labor                                             $1,700,000

Materials and subcontractor        3,500,000

Indirect costs                                    800,000 6,000,000

Estimated profit                                             $2,000,000

At the end of the first year, the following was the status of the contract:

Billings to date $4,500,000

Costs incurred to date

Labor                                       $928,000

Materials and subcontractor 1,296,000

Indirect costs                            386,000

Total costs incurred to date  2,610,000

Less Electrical and mechanical

materials stored on job site    210,000

Adjusted costs incurred       2,400,000

Latest forecast total cost     6,000,000

Billings collected during the year = $3,800,000

e) Latest forecast total costs = $8,120,000

Contract revenue =                    8,000,000

Loss =                                           $120,000

Percentage of completion = $2,400,000/$8,120,000 * 100 = 30%

Loss to report for the year = 30% of $120,000 = $36,000