Homework Chapter 18

Solutions

Problem 1:
Percentage of completion:
Year 1: Profit on the contract 250,000 – (50,000 + 140,000) = 60,000
{50,000/(50,000 + 140,000)} x 60,000 = 15,789
Year 2: Profit on the contract 250,000 – (120,000 + 80,000) = 50,000
{120,000/(120,000 + 80,000)} x 50,000 = 30,000 – 15,789 = 14,211
Year 3: Profit = 250,000 – 200,000 = 50,000
50,000 x 100% = 50,000 – 30,000 = 20,000

Completed Contract Percentage of completion

CIP 50,000 CIP 50,000
Cash 50,000 Cash 50,000

AR 40,000 AR 40,000
Billings 40,000 Billings 40,000

Cash 40,000 Cash 40,000

AR 40,000 AR 40,000

Const Exp. 50,000

CIP 15789
Const. Revenue 65,789

Balance Sheet:
AR 0 AR 0
Inventory Inventory
(50,000 – 40,000) 10,000 (65,789 – 40,000) 25,789

CIP 70,000 CIP 70,000

Cash 70,000 Cash 70,000

AR 90,000 AR 90,000
Billings 90,000 Billings 90,000

Cash 80,000 Cash 80,000

AR 80,000 AR 80,000

Const Exp. 70,000

CIP 14,211
Const. Revenue 84,211

Balance Sheet:
AR 10,000 AR 10,000
Liabilities Inventory
(130,000 - 120,000) 10,000 (150,000- 130,000) 20,000

CIP 80,000 CIP 80,000

Cash 80,000 Cash 80,000

AR 120,000 AR 120,000
Billings 120,000 Billings 120,000

Cash 130,000 Cash 130,000

 AR 130,000 AR 130,000

Const Exp. 80,000

CIP 20,000
Const. Revenue 100,000
Billings 250,000 Billings 250,000
Const. Revenue 250,000 CIP 250,000
Const. Exp. 200,000
CIP 200,000

Problem 2:

Completed contract method:

Year 1: 0
Year 2: 0
Year : 840,000 – (320,000 + 260,000 + 145,000) = $ 115,000

Percentage of completion:
Year 1: Profit on contract: 840,000 – (320,000 + 320,000) = 200,000
[320,000/(320,000 + 320,000)] x 200,000 = 100,000
Year 2: Profit on contract: 840,000 – (320,000 + 260,000 + 145,000) = 115,000
[(320,000 + 260,000)/(320,000 + 260,000 + 145,000)] x 115,000 = 92,000 – 100,000 = (8,000) loss in
current year.
Year 3: 115,000 – 92,000 (for two earlier years) = 23,000

Problem 3:

Ponce Construction, Inc.

Income Statement
For the Year 2008
Revenue from long-term contracts (contract Z)
$233,000
Cost of construction (contract Z)
158,000
Gross profit $ 75,000
Provision for loss (contract Y)* 17,000
*Contract costs through 12/31/08 $100,000
Estimated costs to complete 247,000
Total estimated costs 347,000
Total contract price 330,000
Loss recognized in 2008 $ 17,000
 Ponce Construction, Inc.
Balance Sheet
As of 12/31/08
Current assets:
Accounts receivable ($513,000 – $468,000) $
45,000
Inventories
Construction in process (contract X) $182,000
Less: Billings 165,000
Unbilled contract costs 17,000
Current liabilities:
Billings ($115,000) in excess of contract costs ($100,000) 15,000
Estimated loss from long-term contracts 17,000

Problem 4:

Percentage of completion Year 2: Profit on contract = 150,000 – (10,000 + 20,000 + 40,000) = 80,000
[(10,000+20,000)/(10,000+20,000+40,000)] x 80,000 = 34,285 – 5,000 = 29,285

Completed contract: Year 1 and 2: 0

Year 3:
Completed contract Loss $ 50,000
Percentage of completion: Loss = $ 50,000 + $ 34,285 = $ 84,285

Problem 5:

a. Cash collected = Billings – AR balance = 123,000 – 43,000 = $ 80,000

b. Cost of construction = CIP – Income recognized = 130,000 – 36,400 = 93,600

Profit on contract = 2,000,000 – (93,600 + Est. costs)
Profit recognized this year = [Costs to date/Costs to date plus costs to complete] x profit on contract
36,400 = [93,600/(Total costs)] x [2,000,000 – (Total costs)]

Solving the equation, Total costs = 1,440,000

Profit on contract = 2,000,000 – 1,440,000 = 560,000

Problem 6:
Year 1:
Sales 300,000
COS 180,000
Profit 120,000
% 40%
Cash collected 140,000
Profit recognized 140,000 x 40% = 56,000 recognized profit

Year 2:
Sales 500,000
COGS 350,000
Profit 150,000
% 30%
Cash collected for year 2 400,000 x 30% = 120,000 recog. Profit
Cash collected for year 1 160,000 x 40% = 64,000 recg profit
Problem 6:

Deferred GP (30,000 x 20%) 6,000

Repo merchandise 27,000
Gain on repo 3,000
Installment AR 30,000

Problem 7:

Year 1 Sales:

Profit recognized in year 1 $ 0 since the cost of $ 35,000 has not been recovered
Profit recognized in year 2: Cost $ 35,000 – cash received in year 1 – cash received in year 2 = $ 10,000
recognized as profit.

Year 2 Sales:
Profit recognized in year 2 = $ 0.