Part A
On July 1, 2011, Straight Construction Company signed a three year construction contract agreeing to build a tunnel under the Potomac connecting Maryland and DC for a price of $8,000,000. During 2011, costs of $2,000,000 are incurred with estimated costs of $4,000,000 to be incurred. Billings of $2,500,000 were sent and cash in the amount of $2,250,000 was collected.
In 2012, costs of $2,500,000 were incurred with remaining costs estimated at $3,600,000. Billings sent in 2012 aggregated $2,750,000 and $2,475,000 was collected. The tunnel was completed in 2013 after $3,800,000 was incurred and spent. The company has a calendar year end. The company uses the percentage-of-completion method for financial reporting.
a. Calculate the amount of gross profit or loss to be recognized in each of the three years;
b. Prepare journal entries for 2011 and 2012 to record the transactions described (credit various accounts for construction costs incurred;
c. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2011 and 2012
Part B
Perform the same steps as outlined above assuming the company uses the completed-contract method.