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1. Reese Construction Corporation contracted to construct a building for $1,500,000.

Construction began in 2007 and was completed in 2008. Data relating to the contract are
summarized below:
Year ended
December 31,
2007
2008
Costs incurred
$600,000
$450,000
Estimated costs to complete
400,000

Reese uses the percentage-of-completion method as the basis for income recognition.
For the years ended December 31, 2007, and 2008, respectively, Reese should report
gross profit of
a. $270,000 and $180,000.
b. $900,000 and $600,000.
c. $300,000 and $150,000.
d. $0 and $450,000.
C
2. Winsor Construction Company uses the percentage-of-completion method of accounting. In
2007, Winsor began work on a contract it had received which provided for a contract price of
$15,000,000. Other details follow:
2007
Costs incurred during the year
$7,200,000
Estimated costs to complete as of December 31
4,800,000
Billings during the year
6,600,000
Collections during the year
3,900,000
What should be the gross profit recognized in 2007?
a. $600,000
b. $7,800,000
c. $1,800,000
d. $3,000,000
c

In 2007, Crane Corporation began construction work under a three-year contract. The contract
price is $2,400,000. Crane uses the percentage-of-completion method for financial accounting
purposes. The income to be recognized each year is based on the proportion of costs incurred
to total estimated costs for completing the contract. The financial statement presentations
relating to this contract at December 31, 2007, follow:
Balance Sheet
Accounts receivableconstruction contract billings
Construction in progress
Less contract billings
Costs and recognized profit in excess of billings
Income Statement
Income (before tax) on the contract recognized in 2007

$100,000
$300,000
240,000
60,000

$60,000

3.

How much cash was collected in 2007 on this contract?


a. $100,000
b. $140,000
c. $20,000
d. $240,000

b
4.

What was the initial estimated total income before tax on this contract?
a. $300,000
b. $320,000
c. $400,000
d. $480,000
d

5.

Eaton Construction Co. uses the percentage-of-completion method. In 2007, Eaton


began work on a contract for $3,300,000 and it was completed in 2008. Data on the
costs are:
Year Ended December 31
2007
2008
Costs incurred
$1,170,000
$840,000
Estimated costs to complete
780,000

For the years 2007 and 2008, Eaton should recognize gross profit of
a.
b.
c.
d.

2007
$0
$774,000
$810,000
$810,000

2008
$1,290,000
$516,000
$480,000
$1,290,000

c
Use the following information for questions 66 and 67.
Ramos, Inc. began work in 2007 on contract #3814, which provided for a contract price of
$7,200,000. Other details follow:
2007
2008
Costs incurred during the year
$1,200,000
$3,675,000
Estimated costs to complete, as of December 31
3,600,000
0
Billings during the year
1,350,000
5,400,000
Collections during the year
900,000
5,850,000

6.

Assume that Ramos uses the percentage-of-completion method of accounting. The


portion of the total gross profit to be recognized as income in 2007 is

a.
b.
c.
d.

$450,000.
$600,000.
$1,800,000.
$2,400,000.

B
7.

Assume that Ramos uses the completed-contract method of accounting. The portion of
the total gross profit to be recognized as income in 2008 is
a. $900,000.
b. $1,350,000.
c. $2,325,000.
d. $7,200,000.

c
Use the following information for questions 68 and 69.
Miley, Inc. began work in 2007 on a contract for $8,400,000. Other data are as follows:
2007
2008
Costs incurred to date
$3,600,000
$5,600,000
Estimated costs to complete
2,400,000

Billings to date
2,800,000
8,400,000
Collections to date
2,000,000
7,200,000
8.

If Miley uses the percentage-of-completion method, the gross profit to be recognized in


2007 is
a. $1,440,000.
b. $1,600,000.
c. $2,160,000.
d. $2,400,000.
A

9.

If Miley uses the completed-contract method, the gross profit to be recognized in 2008 is
a. $1,360,000.
b. $2,800,000.
c. $1,400,000.
d. $5,600,000.
B

10.

Parker Construction Co. uses the percentage-of-completion method. In 2007, Parker


began work on a contract for $5,500,000; it was completed in 2008. The following cost
data pertain to this contract:
Year Ended December 31
2007
2008
Cost incurred during the year
$1,950,000
$1,400,000
Estimated costs to complete at the end of year
1,300,000

The amount of gross profit to be recognized on the income statement for the year ended
December 31, 2008 is
a. $800,000.
b. $860,000.
c. $900,000.
d. $2,150,000.
A
11.

If the completed-contract method of accounting was used, the amount of gross profit to
be recognized for years 2007 and 2008 would be
a.
b.
c.
d.

2007
$2,250,000.
$2,150,000.
$0.
$0.

2008
$0.
$(100,000).
$2,150,000.
$2,250,000.

C
12.

Willingham Construction Company uses the percentage-of-completion method. During


2007, the company entered into a fixed-price contract to construct a building for
Richman Company for $30,000,000. The following details pertain to the contract:
Percentage of completion
Estimated total cost of contract
Gross profit recognized to date

At December 31, 2007


25%
$22,500,000
1,875,000

At December 31, 2008


60%
$25,000,000
3,000,000

The amount of construction costs incurred during 2008 was


a. $15,000,000.
b. $9,375,000.
c. $5,625,000.
d. $2,500,000.
B
Use the following information for questions 73 and 74.
Carter Construction Company had a contract starting April 2008, to construct a $15,000,000
building that is expected to be completed in September 2009, at an estimated cost of
$13,750,000. At the end of 2008, the costs to date were $6,325,000 and the estimated total
costs to complete had not changed. The progress billings during 2008 were $3,000,000 and the
cash collected during 2008 was $2,000,000. Carter uses the percentage-of-completion method.
13.

For the year ended December 31, 2008, Carter would recognize gross profit on the
building of
a. $0.
b. $527,083.
c. $575,000.
d. $675,000.
c

14.

At December 31, 2008, Carter would report Construction in Process in the amount of
a. $6,900,000.
b. $6,325,000.
c. $5,900,000.
d. $575,000.
A

15.

Kirby Builders, Inc. is using the completed-contract method for a $5,600,000 contract
that will take two years to complete. Data at December 31, 2007, the end of the first
year, are as follows:
Costs incurred to date
$2,560,000
Estimated costs to complete
3,280,000
Billings to date
2,400,000
Collections to date
2,000,000
The gross profit or loss that should be recognized for 2007 is
a. $0.
b. a $240,000 loss.
c. a $120,000 loss.
d. a $105,600 loss.
B

Use the following information for questions 76 through 78.


Melton Construction Co. began operations in 2007. Construction activity for 2007 is shown
below. Melton uses the completed-contract method.

Contract
1
2
3
16.

Contract
Price
$3,200,000
3,600,000
3,300,000

Billings
Through
12/31/07
$3,150,000
1,500,000
1,900,000

Collections
Through
12/31/07
$2,600,000
1,000,000
1,800,000

Costs to
12/31/07
$2,150,000
820,000
2,250,000

Estimated
Costs to
Complete

$1,880,000
1,200,000

Which of the following should be shown on the income statement for 2007 related to
Contract 1?
a. Gross profit, $450,000
b. Gross profit, $1,000,000
c. Gross profit, $1,050,000
d. Gross profit, $600,000
c

17.

Which of the following should be shown on the balance sheet at December 31, 2007
related to Contract 2?
a. Inventory, $680,000
b. Inventory, $820,000
c. Current liability, $680,000
d. Current liability, $1,500,000
c

18.

Which of the following should be shown on the balance sheet at December 31, 2007
related to Contract 3?
a. Inventory, $200,000
b. Inventory, $350,000
c. Inventory, $2,100,000
d. Inventory, $2,250,000
a

19 Flynn Construction Co. has consistently used the percentage-of-completion method of


recognizing revenue. During 2007, Flynn entered into a fixed-price contract to construct
an office building for $12,000,000. Information relating to the contract is as follows:
At December 31
2007
2008
Percentage of completion
15%
45%
Estimated total cost at completion
$9,000,000
$9,600,000
Gross profit recognized (cumulative)
600,000
1,440,000
Contract costs incurred during 2008 were
a. $2,880,000.
b. $2,970,000.
c. $3,150,000.
d. $4,320,000.
b

20.

Noland Constructors, Inc. has consistently used the percentage-of-completion method of


recognizing income. In 2007, Noland started work on a $35,000,000 construction
contract that was completed in 2008. The following information was taken from Noland's
2007 accounting records:
Progress billings
$11,000,000
Costs incurred
10,500,000
Collections
7,000,000
Estimated costs to complete
21,000,000
What amount of gross profit should Noland have recognized in 2007 on this contract?
a. $3,500,000
b. $2,333,334
c. $1,750,000
d. $1,166,667

d
computational:
1.

$600,000
($1,500,000 $1,000,000) = $300,000
$600,000 + $400,000
($1,500,000 $1,050,000) $300,000 = $150,000.

2.

$7,200,000
($15,000,000 $12,000,000) = $1,800,000.
$7,200,000 + $4,800,000

3.

$240,000 $100,000 = $140,000.

4.

$300,000 $60,000 = $240,000


$240,000
($2,400,000 Total estimated cost) = $60,000
Total estimated cost
Total estimated cost = $1,920,000
$2,400,000 $1,920,000 = $480,000.

5.

$1,170,000
- ($3,300,000 $1,950,000) = $810,000
$1,950,000
($3,300,000 $2,010,000) $810,000 = $480,000.

6.

$1,200,000
($7,200,000 $4,800,000) = $600,000.
$4,800,000

7.

$7,200,000 $4,875,000 = $2,325,000.

8.

$3,600,000
($8,400,000 $6,000,000) = $1,440,000.
$6,000,000

9.

$8,400,000 $5,600,000 = $2,800,000.

10.

[$1,950,000 ($1,950,000 + $1,300,000)] $2,250,000 = $1,350,000


($5,500,000 $3,350,000) $1,350,00 = $800,000.

11.

$5,500,000 $3,350,000 = $2,150,000.

12.

($25,000,000 .60) ($22,500,000 .25) = $9,375,000.

13.

($6,325,000 $13,750,000) $1,250,000 = $575,000.

14.

($6,325,000 $13,750,000) $1,250,000 = $575,000.


$6,325,000 + $575,000 = $6,900.000.

15.

$5,600,000 ($2,560,000 + $3,280,000) = $240,000.

16.

$3,200,000 $2,150,000 = $1,050,000.

17.

$1,500,000 $820,000 = $680,000.

18.

($2,250,000 $150,000) $1,900,000 = $200,000.

19.

($9,600,000 45%) ($9,000,000 15%) = $2,970,000.

20.

$10,500,000
($35,000,000 $31,500,000) = $1,166,667.
$31,500,000

Ex. 18-110Percentage-of-completion method.


Garnet Construction Co. contracted to build a bridge for $5,000,000. Construction began in
2007 and was completed in 2008. Data relating to the construction are:
Costs incurred
Estimated costs to complete

2007
$1,650,000
1,350,000

2008
$1,375,000

Garnet uses the percentage-of-completion method.


Instructions
(a) How much revenue should be reported for 2007? Show your computation.
(b) Make the entry to record progress billings of $1,650,000 during 2007.
(c) Make the entry to record the revenue and gross profit for 2007.
(d) How much gross profit should be reported for 2008? Show your computation.

Solution 18-110
(a)
$1,650,000
$5,000,000 = $2,750,000
$3,000,000
(b)

Accounts Receivable ................................................................... 1,650,000


Billings on Construction in Process .................................

1,650,000

Solution 18-110 (cont.)


(c) Construction Expenses................................................................ 1,650,000
Construction in Process............................................................... 1,100,000
Revenue from Long-Term Contracts ................................

2,750,000

(d)

Revenue
Costs
Total gross profit
Recognized in 2007
Recognized in 2008
Or
Total revenue
Recognized in 2007
Recognized in 2008
Costs in 2008
Gross profit in 2008

$5,000,000
3,025,000
1,975,000
(1,100,000)
$ 875,000
$5,000,000
(2,750,000)
2,250,000
(1,375,000)
$ 875,000

Ex. 18-111Percentage-of-completion method.


Stiner Builders contracted to build a high-rise for $14,000,000. Construction began in 2007 and
is expected to be completed in 2010. Data for 2007 and 2008 are:
Costs incurred to date
Estimated costs to complete

2007
$1,800,000
7,200,000

2008
$5,200,000
4,800,000

Stiner uses the percentage-of-completion method.


Instructions
(a) How much gross profit should be reported for 2007? Show your computation.
(b) How much gross profit should be reported for 2008?
(c) Make the journal entry to record the revenue and gross profit for 2008.

Solution 18-111
(a) $1,800,000
$5,000,000 = $1,000,000
$9,000,000
(b)

$5,200,000
$4,000,000 = $2,080,000
$10,000,000
Less 2007 gross profit
Gross profit in 2008

(c)

1,000,000
$1,080,000

Construction in Process............................................................... 1,080,000


Construction Expenses................................................................ 3,400,000
Revenue from Long-Term Contracts ................................

4,480,000

Ex. 18-112Percentage-of-completion and completed-contract methods.


On February 1, 2007, Nance Contractors agreed to construct a building at a contract price of
$6,000,000. Nance estimated total construction costs would be $4,000,000 and the project
would be finished in 2009. Information relating to the costs and billings for this contract is as
follows:
Total costs incurred to date
Estimated costs to complete
Customer billings to date
Collections to date

2007
$1,500,000
2,500,000
2,200,000
2,000,000

2008
$2,640,000
1,760,000
4,000,000
3,500,000

2009
$4,600,000
-05,600,000
5,500,000

Instructions
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting
and for completed-contract accounting, show the gross profit that should be recorded for 2007,
2008, and 2009.
Percentage-of-Completion
Completed-Contract
Gross Profit
Gross Profit
2007

__________

2007

__________

2008

__________

2008

__________

2009

__________

2009

__________

Solution 18-112
Percentage-of-Completion
Gross Profit
2007
$750,000a
2008
$210,000b
2009
$440,000c

2007
2008
2009

Completed-Contract
Gross Profit

$1,400,000d

$1,500,000
$2,000,000 = $750,000
$4,000,000

$2,640,000
$1,600,000 = $960,000
$4,400,000

Less 2007 gross profit


2008 gross profit

(750,000)
$210,000

$6,000,000
4,600,000
1,400,000
(960,000)
$ 440,000

$6,000,000
4,600,000
$1,400,000

Total revenue
Total costs
Total gross profit
Recognized to date
2009 gross profit
Total revenue
Total costs
Total gross profit

Pr. 18-117Long-term construction project accounting.


Benson 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. Benson began work on a lump-sum contract at the beginning of 2008. As bid, the
statistics were as follows:
Lump-sum price (contract price)
Estimated costs
Labor
Materials and subcontractor
Indirect costs

$4,000,000
$ 850,000
1,750,000
400,000

3,000,000
$1,000,000

Pr. 18-117 (cont.)


At the end of the first year, the following was the status of the contract:
Billings to date
Costs incurred to date
Labor
Materials and subcontractor
Indirect costs
Latest forecast total cost

$2,230,000
$ 464,000
1,098,000
193,000

1,755,000
3,000,000

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 $105,000. 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 2008.
(b)

Indicate the amount of gross profit that would be reported on this contract at the end of
2008.

(c)
(d)

Make the journal entry to record the income (loss) for 2008 on Benson's books.
Indicate the account(s) and the amount(s) that would be shown on the balance sheet of
Benson Construction at the end of 2008 related to its construction accounts. Also indicate
where these items would be classified on the balance sheet. Billings collected during the
year amounted to $1,980,000.
Assume the latest forecast on total costs at the end of 2008 was $4,050,000. How much
income (loss) would Benson report for the year 2008?

(e)

Solution 18-117
(a) Costs to date
Less materials on job site

$1,755,000
(105,000)
$1,650,000

Costs Incurred to Date


= Percentage of Completion
Total Estimated Costs
$1,650,000
= 55%
$3,000,000
(b)

55% $4,000,000 =
Costs incurred
Gross profit

(c)

Construction Expense ................................................................. 1,650,000


Construction in Process............................................................... 550,000
Revenue from Long-Term Project ....................................

(d)

Current Assets
Accounts receivable

$2,200,000
1,650,000
$ 550,000

2,200,000

$250,000 ($2,230,000 $1,980,000)

Solution 18-117 (cont.)


Current Liability
Billings in excess of contract costs and
recognized profit
(e)

Total loss reported in 2008


Contract price
Estimated cost to complete
Amount of loss to be reported

$30,000 ($2,230,000 $2,200,000)

$4,000,000
4,050,000
$ (50,000)

Pr. 18-118Accounting for long-term construction contracts.


The board of directors of Dodd Construction Company is meeting to choose between the
completed-contract method and the percentage-of-completion method of accounting for longterm contracts in the company's financial statements. You have been engaged to assist Dodd's
controller in the preparation of a presentation to be given at the board meeting. The controller
provides you with the following information:
1.
2.

Dodd commenced doing business on January 1, 2008.


Construction activities for the year ended December 31, 2008, were as follows:

Project
A
B
C
D
E

Project
A
B
C
D
E

3.
4.

Total Contract
Price
$ 515,000
690,000
475,000
200,000
480,000
$2,360,000

Billings Through
12/31/08
$ 340,000
210,000
475,000
100,000
400,000
$1,525,000

Contract Costs
Incurred Through
12/31/08
$ 424,000
195,000
350,000
123,000
320,000
$1,412,000

Estimated
Additional Costs to
Complete Contracts
$101,000
455,000
-097,000
80,000
$733,000

Cash Collections
Through 12/31/08
$ 310,000
210,000
390,000
65,000
400,000
$1,375,000

Each contract is with a different customer.


Any work remaining to be done on the contracts is expected to be completed in 2009.

Instructions
(a) Prepare a schedule by project, computing the amount of income (or loss) before selling,
general, and administrative expenses for the year ended December 31, 2008, which would
be reported under:
(1) The completed-contract method.

(2) The percentage-of-completion method (based on estimated costs).


Pr. 18-118 (cont.)
(b)

Prepare the general journal entry(ies) to record revenue and gross profit on project B
(second project) for 2008, assuming that the percentage-of-completion method is used.

(c)

Indicate the balances that would appear in the balance sheet at December 31, 2008 for the
following accounts for Project D (fourth project), assuming that the percentage-ofcompletion method is used.
Accounts Receivable
Billings on Construction in Process
Construction in Process

(d)

How would the balances in the accounts discussed in part (c) change (if at all) for Project
D (fourth project), if the completed-contract method is used?

Solution 18-118
(a)
(1) and (2)
Projects
Contract price
Contract costs incurred
Additional costs
to complete
Total cost
Total gross profit
or (loss)

A
$515,000
424,000

B
$690,000
195,000

C
$475,000
350,000

D
$200,000
123,000

E
$480,000
320,000

101,000
525,000

455,000
650,000

-0350,000

97,000
220,000

80,000
400,000

$ 40,000

$125,000

$ (20,000)

$ 80,000

$ (10,000)

The amount reported as income (loss) under the completed-contract method for 2008 is:
Project A
B
C
D
E

$(10,000)
-0125,000
(20,000)
-0$ 95,000

The amount reported as income (loss) under the percentage-of-completion method for 2008 is:
Project A
B
C
D
E

(b)

$(10,000)
12,000
125,000
(20,000)
64,000
$171,000

$40,000 ($195,000 $650,000)

$80,000 ($320,000 $400,000)

Construction in Process...............................................................
Construction Expenses................................................................

12,000
195,000

Revenue from Long-term Contracts .................................


Solution 18-118 (cont.)
(c) Billings
Cash collections
Accounts receivable
Billings on Construction in Process
Costs incurred
Loss reported
Construction in process
(d)

207,000

$100,000
65,000
$ 35,000
100,000
$123,000
(20,000)
$103,000

The account balances would be the same.

Pr. 18-119Long-term contract accounting (completed-contract).


Ponce Construction, Inc. experienced the following construction activity in 2008, the first year of
operations.
Cash
Cost
Estimated
Total
Billings
Collections
Incurred
Additional
Contract
through
through
through
Costs to
Contract
Price
12/31/08
12/31/08
12/31/08
Complete
X
$260,000
$165,000
$155,000
$182,000
$ 63,000
Y
330,000
115,000
115,000
100,000
247,000
Z
233,000
233,000
198,000
158,000
-0$823,000
$513,000
$468,000
$440,000
$310,000
Each of the above contracts is with a different customer, and any work remaining at December
31, 2008 is expected to be completed in 2009.
Instructions
Prepare a partial income statement and a partial balance sheet to indicate how the above
contract information would be reported. Ponce uses the completed-contract method.

Solution 18-119
Ponce Construction, Inc.
Income Statement
For the Year 2008
Revenue from long-term contracts (contract Z)
Cost of construction (contract Z)
Gross profit
Provision for loss (contract Y)*
*Contract costs through 12/31/08
Estimated costs to complete
Total estimated costs

$233,000
158,000
$ 75,000
17,000
$100,000
247,000
347,000

Total contract price


Loss recognized in 2008

330,000
$ 17,000

Solution 18-119 (cont.)


Ponce Construction, Inc.
Balance Sheet
As of 12/31/08
Current assets:
Accounts receivable ($513,000 $468,000)
Inventories
Construction in process (contract X)
Less: Billings
Unbilled contract costs
Current liabilities:
Billings ($115,000) in excess of contract costs ($100,000)
Estimated loss from long-term contracts

$ 45,000
$182,000
165,000
17,000
15,000
17,000