Question

(Recognition of Revenue on Long-Term Contract and Entries) Hamilton Construction Company uses the percentage-of-completion method of accounting. In 2017, Hamilton began work under contract #E2-D2, which provided for a contract price of \(2,200,000. Other details follow:

2017 2018

Costs incurred during the year \)640,000 $1,425,000

Estimated costs to complete, as of December 31 960,000 –0–

Billings during the year 420,000 1,680,000

Collections during the year 350,000 1,500,000

Instructions

(a) What portion of the total contract price would be recognized as revenue in 2017? In 2018?

(b) Assuming the same facts as those above except that Hamilton uses the completed-contract method of accounting, what portion of the total contract price would be recognized as revenue in 2018?

(c) Prepare a complete set of journal entries for 2017 (using the percentage-of-completion method).

Short answer

Revenue recognized in 2017 = $880,000

Revenue recognized in 2018 = $1,320,000

Step-by-step solution

Meaning of Long-Term Contract

When a person sign a long-term contract, they agree to work for someone else for a lengthy period of time. A long-term contract is also deemed complete since the parties will never need to change or renegotiate it in the future.

Revenue recognized in 2017 and 2018

2017:

Cost incurred in 2017 = $640,000

Estimated cost = $960,000

$\begin{array}{rcl}\mathbf{Total}\mathbf{}\mathbf{cost}& \mathbf{=}& \mathbf{Cost}\mathbf{}\mathbf{incurred}\mathbf{+}\mathbf{Estimated}\mathbf{}\mathbf{cost}\\ & \mathbf{=}& \mathbf{\$}\mathbf{640}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{960}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{,}\mathbf{000}\end{array}$

Contract price = $2,200,000

$\begin{array}{rcl}\mathbf{Revenue}\mathbf{}\mathbf{recognized}\mathbf{}\mathbf{in}\mathbf{}\mathbf{2017}& \mathbf{=}& \frac{\mathbf{Cost}\mathbf{}\mathbf{incurred}\mathbf{}\mathbf{in}\mathbf{}\mathbf{2017}}{\mathbf{Total}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{in}\mathbf{}\mathbf{2017}}\mathbf{\times }\mathbf{Contract}\mathbf{}\mathbf{price}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{640}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{960}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{2}\mathbf{,}\mathbf{200}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{880}\mathbf{,}\mathbf{000}\end{array}$

2018:

$\begin{array}{rcl}\mathbf{Revenue}\mathbf{}\mathbf{recohnized}\mathbf{}\mathbf{in}\mathbf{}\mathbf{2018}& \mathbf{=}& \mathbf{Contract}\mathbf{}\mathbf{price}\mathbf{-}\mathbf{Revenue}\mathbf{}\mathbf{recognized}\mathbf{}\mathbf{in}\mathbf{}\mathbf{2017}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{200}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{880}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{320}\mathbf{,}\mathbf{000}\end{array}$