Pr. 18-118—Accounting 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 long-term 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.Dodd commenced doing business on January 1, 2008.
2.Construction activities for the year ended December 31, 2008, were as follows:
Total Contract Billings Through Cash Collections
Project Price 12/31/08 Through 12/31/08
A$ 515,000 $ 340,000 $ 310,000
B690,000 210,000 210,000 C 475,000 475,000 390,000 D 200,000 100,000 65,000
E 480,000 400,000 400,000
$2,360,000 $1,525,000 $1,375,000
Contract Costs Estimated
Incurred Through Additional Costs to
Project 12/31/08 Complete Contracts
A$ 424,000 $101,000
C350,000 -0- D 123,000 97,000
E 320,000 80,000
3.Each contract is with a different customer.
4.Any work remaining to be done on the contracts is expected to be completed in 2009.
(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-of-completion method is used.
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?