E3-2. Determining gross profit using percentage-of-completion

E3-2. Determining gross profit using percentage-of-completion The gross profit for the percentage-of-completion method is as follows:

Contract price Cost to date Est. cost to complete Total cost Expected gross profit Percentage complete (18/24) Profit to recognize date Profit previously recognized 2012 gross profit

$1,800,000 600,000

$3,000,000

2,400,000 600,000 75% 450,000 (300,000)

$ 150,000

E3-12. Franchise sales; revenue recognition

Requirement 1:

April 1, 2011 To record franchise agreement and down payment

DR Cash

$60,000

DR Note receivable

240,000

CR Unearned franchise fee revenue

$300,000

Requirement 2:

August 15, 2011 To recognize franchise fee revenue

DR Unearned franchise fee revenue $300,000

CR Franchise fee revenue

$300,000

P3-4. Income recognition on long-term contracts.

Requirement 1: a. No income will be recognized in 2011 under the completed-contract method

as the project is not complete.

b. Income for 2011 = $8,000,000 x ($30,000,000 ? $24,000,000) $24,000,000

= .33 x $6,000,000 = $2,000,000

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Note: Materials purchased but not used are not included in the numerator of the cost percentage for 2011 but are included in the estimated total project costs ($8,000,000 + $15,500,000 + $500,000).

Requirement 2:

DR Construction in progress DR Material inventory

CR Cash

Percentage of completion $8,000,000

500,000 $8,500,000

Completed contract

(same)

DR Accounts receivable CR Billings on contract

$9,000,000

(same)

$9,000,000

DR Cash CR Accounts receivable

$7,500,000

(same)

$7,500,000

DR Construction in progress DR Construction expenses

CR Construction revenue

$2,000,000 8,000,000

(No entry) $10,000,000

P3-5. Long-term construction contract accounting

(AICPA adapted)

Completed-Contract Method

Year 2011 DR Construction in progress

CR Cash, payables, materials, etc.

$290,000

$290,000

DR Accounts receivable CR Billings on contract

$260,000

$260,000

DR Cash CR Accounts receivable

$240,000

$240,000

Since the project is incomplete, no revenue is recognized for the year 2011.

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Balance Sheet Presentation at the End of 2011 Completed-Contract Method

Current Assets: Construction in progress Less: Billings on contract Unbilled costs of construction

$290,000 (260,000) $30,000

Accounts receivable

$20,000

Year 2012 DR Construction in progress

CR Cash, payables, materials, etc.

DR Accounts receivable CR Billings on contract

DR Cash CR Accounts receivable

DR Billings on contract CR Construction in progress CR Income on long-term construction contracts

$150,000 $265,000 $285,000 $525,000

$150,000 $265,000 $285,000 $440,000

85,000

Alternate entry: DR Construction expense DR Billings on contract

CR Construction in progress CR Construction revenue

$440,000 525,000

Percentage-of-Completion Method

Year 2011 DR Construction in progress

CR Cash, payables, materials, etc.

$290,000

DR Accounts receivable CR Billings on contract

$260,000

DR Cash CR Accounts receivable

$240,000

DR Construction in progress1 CR Income on long-term construction contracts

$60,000

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$440,000 525,000

$290,000 $260,000 $240,000

$60,000

Alternate entry: DR Construction in progress1 DR Construction expense

CR Construction revenue

1Contract price - Actual costs to date - Estimated costs to complete

Total estimated costs of project Estimated total gross margin

$ 60,000 290,000

$350,000

($290,000) (145,000)

$525,000

(435,000) $90,000

Revenue earned during the period: ($290,000/$435,000) x $525,000 = $350,000 Gross margin earned during the period: ($290,000/$435,000) x $90,000 = $60,000

Balance Sheet Presentation at the End of 2011 Percentage-of-Completion Method

Current Assets: Construction in progress Less: Billings on contract Unbilled costs of construction

$350,000 (260,000) $90,000

Accounts receivable

$20,000

Year 2012 DR Construction in progress

CR Cash, payables, materials, etc.

DR Accounts receivable CR Billings on contract

DR Cash CR Accounts receivable

DR Construction in progress CR Income on long-term construction contracts

$150,000 $265,000 $285,000

$25,000

$150,000 $265,000 $285,000

$25,000

Alternate Entry: DR Construction in progress DR Construction expense

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$ 25,000 150,000

CR Construction revenue

$175,000

Total

2011

2012

Construction revenue

$525,000

$350,000

Construction expense

(440,000)

(290,000)

Gross margin

$ 85,000

$ 60,000

P3-6. Determining income under installment sales method

(AICPA adapted)

$175,000 (150,000) $ 25,000

Income before income taxes on installment sale contract:

Sales Cost of sales

$556,000 (417,000)

Gross profit 139,000

Interest income (from following calculations) 27,360

Income before income taxes

$166,360

Calculations to determine interest income on installment sale contract:

Cash selling price Less: July 1, 2011, payment

Interest rate Annual interest Interest July 1, 2011, to December 31, 2011

($54,720 x 1/2)

$556,000 (100,000)

456,000 12%

$ 54,720

$ 27,360

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