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

B195,000 455,000

C350,000 -0-  D 123,000 97,000

E      320,000     80,000

$1,412,000 $733,000

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.

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-of-completion 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?

 

 

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