31.

In selecting an accounting method for a newly contracted long-term construction project, the principal
factor to be considered should be:

a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete & extent of progress toward
completion is practicable.
c. the method commonly used by the contractor to account for other L-T construction contracts.
d. the inherent nature of the contractor's technical facilities used in construction.


32. The percentage-of-completion method must be used when certain conditions exist.
Which of the following is not one of those necessary conditions?

a. Estimates of progress toward completion, revenues, & costs are reasonably dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the consideration to be
exchanged, & the manner & terms of settlement.


33. When work to be done & costs to be incurred on a long-term contract can be estimated dependably,
which of the following methods of revenue recognition is preferable?

a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these


34. How should the balances of progress billings & construction in process be shown at reporting dates
prior to the completion of a long-term contract?

a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, & current liability if credit balance.
d. Net, as income from construction if credit balance, & loss from construction if debit balance.


35. In accounting for a long-term construction-type contract using the percentage-of-completion
method, the gross profit recognized during the 1
st
year would be the estimated total gross profit
from the contract, multiplied by the %age of the costs incurred during the year to the:

a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.


36. How should earned but unbilled revenues at the balance sheet date on a long-term construction
contract be disclosed if the percentage-of-completion method of revenue recognition is used?

a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the FSs until the customer is formally billed for the portion of work completed.


37. The principal disadvantage of using the percentage-of-completion method of recognizing revenue
from long-term contracts is that it:

a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable uncertainty.
c. is likely to assign a small amt. of revenue to a period during which much revenue was actually
earned.
d. none of these.



S
38. One of the more popular input measures used to determine the progress toward completion in the
percentage-of-completion method is:

a. revenue-percentage basis.
b. cost-percentage basis.
c. progress completion basis.
d. cost-to-cost basis.


61. Reese Construction Corporation contracted to construct a building for $1,500,000.
Construction began in 2007 & 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 %age-of-completion method as the basis for income recognition. For the years
ended December 31, 2007, & 2008, respectively, Reese should report gross profit of $300,000 &
$150,000.

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

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



62. 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? $1,800,000


In 2007, Crane Corporation began construction work under a 3-year contract. Contract price = $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 $100,000
Construction in progress $300,000
Less contract billings 240,000
Costs & recognized profit in excess of billings 60,000

Income Statement
Income (before tax) on the contract recognized in 2007 $60,000

63. How much cash was collected in 2007 on this contract? $140,000

64. What was the initial estimated total income before tax on this contract? $480,000

65. Eaton Construction Co. uses the percentage-of-completion method. In 2007, Eaton began work on a
contract for $3,300,000 & 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 & 2008, Eaton should recognize gross profit of $810,000 & $480,000



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

66. 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 $600,000.


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

68. Miley uses the %age-of-completion method. The gross profit to be recognized in 2007 is:
$1,440,000.


70. 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 $800,000.

72. 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:
At December 31, 2007 At December 31, 2008
Percentage of completion 25% 60%
Estimated total cost of contract $22,500,000 $25,000,000
Gross profit recognized to date 1,875,000 3,000,000
The amount of construction costs incurred during 2008 was $9,375,000.


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 & the estimated total costs to complete had not changed. The progress
billings during 2008 were $3,000,000 & the cash collected during 2008 was $2,000,000. Carter uses the
percentage-of-completion method.

73. For 2008, Carter would recognize gross profit on the building of $575,000.

74. At December 31, 2008, Carter would report Construction in Process in the amount of $6,900,000.


96. 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 $2,970,000.



97. 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? $1,166,667


Ex. 18-108Long-term construction contracts (essay).
In accounting for long-term construction contracts (those taking longer than one year to complete), the two
methods commonly followed are percentage-of-completion & completed-contract.

Discuss how earnings on long-term construction contracts are recognized & computed under these
two methods.

The revenue recognized on a long-term construction contract under the percentage-of-completion method
is determined by applying a percentage representing the degree of completion to the total contract price at
the end of the accounting period. The percentage may be derived by dividing the costs incurred to date by
the total estimated costs of the entire contract based on the most recent information. The revenue so
derived is then reduced by the direct contract costs to determine the gross profit recognized in the initial
period.
In subsequent periods, since the percentage-of-completion method described produces cumulative results,
revenue & gross profit recognized in prior periods must be subtracted to obtain current revenue & gross
profit to be recognized.
Under the completed-contract method, no earnings are recognized until the contract is substantially
completed. For the period in which completion occurs, gross revenues include the total contract price. Total
job costs incurred are deducted from gross revenues, resulting in recognition of the entire amount of gross
profit in the completion period. If it is expected that a loss will occur on the contract, a provision for loss
should be recognized immediately under both the completed-contract method & the percentage-of-
completion method.


Under what circumstances should one method be used over the other?

The percentage-of-completion method should be used when estimates of the bases upon which progress is
measured are reasonably dependable & all the following conditions exist:

1. The contract clearly specifies the enforceable rights regarding goods or services to be provided &
received by the parties, the consideration to be exchanged, & the manner & terms of settlement.
2. The buyer can be expected to satisfy all obligations under the contract.
3. The contractor can be expected to perform the contractual obligation.

The completed-contract method should be used when inherent hazards or lack of depend-able estimates
cause the forecasts to be of doubtful value.


How are job costs & interim billings reflected on the balance sheet under the percentage-of-
completion method & the completed-contract method?

Under the percentage-of-completion method, a schedule is made of the contracts in process, showing the
total costs incurred as of the end of a given period, the estimated gross profit recognized based on the
degree of completion, & the total billings rendered on each individual contract. If costs incurred plus
recognized profits exceed the related billings on a contract, this net figure is shown as a current asset. This
treatment shows that the contractor has not fully billed the customer for work performed to date & has a
claim against the customer for that portion of work completed but not yet billed. If billings on a contract
exceed costs incurred plus estimated profits, this net figure is shown as a current liability, which means
that the contractor has overbilled the customer for work done to date & must complete the work
represented by the excess billings.
Under the completed-contract method, the treatment of excess costs & billings is the same as under the
percentage-of-completion method except that estimated profits are not computed because profit
recognition is deferred until a contract is completed. The excess of costs over related billings on a contract
is a current asset while the excess of billings over related costs on a contract is a current liability.

Ex. 18-109Journal entriespercentage-of-completion.
Grant Construction Company was awarded a contract to construct an interchange at the junction of U.S. 94
& Highway 30 at a total contract price of $8,000,000. The estimated total costs to complete the project were
$6,000,000.

Instructions
(a) Make the entry to record construction costs of $3,600,000, on construction in process to date.
(b) Make the entry to record progress billings of $2,000,000.
(c) Make the entry to recognize the profit that can be recognized to date, on a %age-of-completion basis.

(a) Construction in Process ........................................................................................ 3,600,000
Materials, Cash, Payables, Etc. ............................................................ 3,600,000

(b) Accounts Receivable ............................................................................................... 2,000,000
Billings on Construction in Process .................................................. 2,000,000

(c) Construction Expenses .......................................................................................... 3,600,000
Construction in Process (60% complete) ...................................................... 1,200,000
Revenue from Long-Term Contracts ............................................... 4,800,000


Ex. 18-110Percentage-of-completion method.
Garnet Construction Co. contracted to build a bridge for $5,000,000. Construction began in 2007 & was
completed in 2008. Data relating to the construction are:
2007 2008
Costs incurred $1,650,000 $1,375,000
Estimated costs to complete 1,350,000

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 & 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

(c) Construction Expenses .......................................................................................... 1,650,000
Construction in Process ........................................................................................ 1,100,000
Revenue from Long-Term Contracts ............................................... 2,750,000

(d) Revenue $5,000,000
Costs 3,025,000
Total gross profit 1,975,000
Recognized in 2007 (1,100,000)
Recognized in 2008 $ 875,000
Or
Total revenue $5,000,000
Recognized in 2007 (2,750,000)
Recognized in 2008 2,250,000
Costs in 2008 (1,375,000)
Gross profit in 2008 $ 875,000



Ex. 18-111Percentage-of-completion method.
Stiner Builders contracted to build a high-rise for $14,000,000. Construction began in 2007 & is expected to
be completed in 2010. Data for 2007 & 2008 are:
2007 2008
Costs incurred to date $1,800,000 $5,200,000
Estimated costs to complete 7,200,000 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 & 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 1,000,000
Gross profit in 2008 $1,080,000

(c) Construction in Process ........................................................................................ 1,080,000
Construction Expenses .......................................................................................... 3,400,000
Revenue from Long-Term Contracts ............................................... 4,480,000


Ex. 18-112Percentage-of-completion & 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 & the project would be finished in 2009.
Information relating to the costs & billings for this contract is as follows:
2007 2008 2009
Total costs incurred to date $1,500,000 $2,640,000 $4,600,000
Estimated costs to complete 2,500,000 1,760,000 -0-
Customer billings to date 2,200,000 4,000,000 5,600,000
Collections to date 2,000,000 3,500,000 5,500,000
Instructions
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting & for
completed-contract accounting, show the gross profit that should be recorded for 2007, 2008, & 2009.
Percentage-of-Completion Completed-Contract
Gross Profit Gross Profit
2007 ________________ 2007 ________________

2008 ________________ 2008 ________________

2009 ________________ 2009 ________________



Solution 18-112
Percentage-of-Completion Completed-Contract
Gross Profit Gross Profit
2007 $750,000
a
2007
2008 $210,000
b
2008
2009 $440,000
c
2009 $1,400,000
d


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

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

Less 2007 gross profit (750,000)
2008 gross profit $210,000

c
Total revenue $6,000,000
Total costs 4,600,000
Total gross profit 1,400,000
Recognized to date (960,000)
2009 gross profit $ 440,000

d
Total revenue $6,000,000
Total costs 4,600,000
Total gross profit $1,400,000


PROBLEMS

Pr. 18-117Long-term construction project accounting.
Benson Construction specializes in the construction of commercial & 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 & 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) $4,000,000
Estimated costs
Labor $ 850,000
Materials & subcontractor 1,750,000
Indirect costs 400,000 3,000,000
$1,000,000

At the end of the first year, the following was the status of the contract:
Billings to date $2,230,000
Costs incurred to date
Labor $ 464,000
Materials & subcontractor 1,098,000
Indirect costs 193,000 1,755,000
Latest forecast total cost 3,000,000

It should be noted that included in the above costs incurred to date were standard electrical & 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) Make the journal entry to record the income (loss) for 2008 on Benson's books.
(d) Indicate the account(s) & 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.
(e) 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?

(a) Costs to date $1,755,000
Less materials on job site (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 = $2,200,000
Costs incurred 1,650,000
Gross profit $ 550,000

(c) Construction Expense ............................................................................................ 1,650,000
Construction in Process ........................................................................................ 550,000
Revenue from Long-Term Project .................................................... 2,200,000

(d) Current Assets
Accounts receivable $250,000 ($2,230,000 $1,980,000)

Current Liability
Billings in excess of contract costs and
recognized profit $30,000 ($2,230,000 $2,200,000)

(e) Total loss reported in 2008
Contract price $4,000,000
Estimated cost to complete 4,050,000
Amount of loss to be reported $ (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 & 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
B 690,000 210,000 210,000
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
B 195,000 455,000
C 350,000 -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, &
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).

(b) Prepare the general journal entry(ies) to record revenue & 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?

(a) (1) & (2)
Projects A B C D E
Contract price $515,000 $690,000 $475,000 $200,000 $480,000
Contract costs incurred 424,000 195,000 350,000 123,000 320,000
Additional costs
to complete 101,000 455,000 -0- 97,000 80,000
Total cost 525,000 650,000 350,000 220,000 400,000
Total gross profit
or (loss) $ (10,000) $ 40,000 $125,000 $ (20,000) $ 80,000

The amount reported as income (loss) under the completed-contract method for 2008 is:

Project A $(10,000)
B -0-
C 125,000
D (20,000)
E -0-
$ 95,000

The amount reported as income (loss) under the percentage-of-completion method for 2008 is:

Project A $(10,000)
B 12,000 $40,000 ($195,000 $650,000)
C 125,000
D (20,000)
E 64,000 $80,000 ($320,000 $400,000)
$171,000

(b) Construction in Process ........................................................................................ 12,000
Construction Expenses .......................................................................................... 195,000
Revenue from Long-term Contracts................................................. 207,000

(c) Billings $100,000
Cash collections 65,000
Accounts receivable $ 35,000
Billings on Construction in Process 100,000

Costs incurred $123,000
Loss reported (20,000)
Construction in process $103,000

(d) The account balances would be the same.