Chapter 18: Question 33E-b (page 1040)

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2019. The following information is available.
2017 2018 2019
Costs incurred to date $400,000 $825,000 $1,070,000
Estimated costs to complete 600,000 275,000 –0–
Billings to date 300,000 900,000 1,600,000
Collections to date 270,000 810,000 1,425,000
Instructions
(b) Prepare all necessary journal entries for 2018.

Short Answer

Expert verified

Revenue from long-term contract is $560,000.

Step by step solution

Meaning of Long-Term Contract

A long-term contractis when you commit to working for someone else for an extended period of time. Because the parties will never need to amend or renegotiate the contract as the future unfolds, a long-term contract is also considered complete.

Journal entries for 2018

Date	Particular	Debit ($)	Credit ($)
	Construction in process a/c	425,000
	Materials, cash, payables, etc. a/c		425,000

	Accounts receivables a/c	600,000
	Billing on construction in process a/c		600,000

	Construction expenses a/c	425,000
	Construction in process a/c	135,000
	Revenue from long term contract a/c		560,000

Working Notes:

$\begin{array}{rcl} Material cash, payables etc & = & Cost incurred in 2018 - Cost incurred in 2018 \\ = & $ 825, 000 - $ 400, 000 \\ = & $ 425, 000 \end{array}$

$\begin{array}{rcl} Account receivables & = & Billing to date 2018 - Billing to date in 2017 \\ = & $ 900, 000 - $ 300, 000 \\ = & $ 600, 000 \end{array}$

$\begin{array}{rcl} Revenue & = & (Contract price \times Percentage of completion in 2018) - (Contract price \times Percentage of completion in 2017) \\ = & ($ 1, 600, 000 \times 75 %) - ($ 1, 600, 000 \times 40 %) \\ = & (1, 200, 000 - $ 640, 000) \\ = & $ 560, 000 \end{array}$

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Short Answer

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Meaning of Long-Term Contract

Journal entries for 2018

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