Module 5: Problem 1.
The board of directors of Ogle Construction Company is meeting to choose between the completed-contract method and the percentage-of-completion method of accounting for long-term contracts in the company's financial statements. You have been engaged to assist Ogle's controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information:
1. Ogle commenced doing business on January 1, 2013.
2. Construction activities for the year ended December 31, 2013, were as follows:
Total Contract Billings Through Cash Collections
Project Price 12/31/13 Through 12/31/11
A $ 510,000 $ 340,000 $ 310,000
B 700,000 210,000 210,000
C 475,000 475,000 390,000
D 200,000 100,000 65,000
E 460,000 400,000 400,000
$2,345,000 $1,525,000 $1,375,000
Contract Costs Estimated
Incurred Through Additional Costs to
Project 12/31/13 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 2014.
Instructions
(a) Prepare a schedule by project, computing the amount of income (or loss) before selling, general, and administrative expenses for the year ended December 31, 2013, 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 and gross profit on project B (second project) for 2013, assuming that the percentage-of-completion method is used.
(c) Indicate the balances that would appear in the balance sheet at December 31, 2013 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?