During 2019, Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2021. The following information is given with contract price, costs incurred, estimated costs to complete, partial billings, and collection.

 

2019 2020 2021

• Construction costs incurred to date...................... $400,000 $60,000 $1,070,00
• Estimated costs to complete the contract..........$600,000 $275,000 -
• Billings during the year...................................................$300,000 $600,000 $700,000
• Collections during the year...........................................$270,000 $540,000 $790,000

Instruction; On the basis of the data above,

A. Prepare the journal entries for year 2020 under percentage of completion method to record (1) the costs of construction, (2) progress billings, and (3) collections for Nilsen Construction (4) revenue, expense ans gross-profit and;

B. Show the partial balance sheet of 2020.

Gross profit to be recognized in 2019:

Contract price = $1,600,000

Cost incurred till date = $400,000

Total cost = $400,000 + $600,000

              = $1,000,000

Percentage of completion = $400,000/$1,000,000 = 40%

Profit = $1,600,000 - $1,000,000

      = $600,000

Profit recognized = $600,000*40% = $240,000

Gross profit to be recognized in 2020:

Cost incurred till date = $600,000

Total costs = $600,000 + $400,000 + $275,000 = $875,000

Percentage of completion = $1,000,000/$1,275,000 = 78%

Profit = $1,600,000 - $1,275,000

         = $325,000 *78%

          = $253,500

Gross profit recognized = $253,500 - $240,000

                                     = $13,500

Gross profit recognized in 2021:

Contract price = $1,600,000

Costs incurred till date = $1,070,000

Total profit = $1,600,000 - $1,070,000

                   = $530,000

Gross profit to be recognized = $530,000 -$240,000 -$13,500

                                              = $276,500

Step-by-step explanation

Journal entries

Date

Particulars

Debit

Credit

2019

Construction in process a/c Dr

 To materials, cash and payable a/c

$400,000

 

$400,000

 

Accounts receivable a/c Dr

 To Billings on construction in process a/c

$300,000

 

$300,000

 

Cash a/c Dr

 To Accounts receivable a/c

$270,000

 

$270,000

 

 

 

 

2020

Construction in process a/c Dr

 To materials, cash and payables a/c

$200,000

 

$200,000

 

Accounts receivable a/c Dr

 To Billings on construction in process a/c

$600,000

 

$600,000

 

Cash a/c Dr

 To Accounts receivable a/c

$540,000

 

$540,000

 

 

 

 

2021

Construction in process a/c Dr

 To materials, cash and payable a/c

$70,000

 

$70,000

 

Accounts receivable a/c Dr

 To Billings on construction in process a/c

$700,000

 

$700,000

 

Cash a/c Dr

 To Accounts receivable a/c

$790,000

 

$790,000