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 = $880,000.

Step-by-step solution

Percentage-of-Completion Method

The percentage of completion technique is a method of revenue recognition, in which revenue is recognized based on the percentage of earned revenue in a specific accounting period.

Journal entries for 2017

Date	Particular	Debit ($)	Credit ($)
	Construction in process a/c Dr.	640,000
	To Materials, cash, payables a/c		640,000
	Accounts receivables a/c Dr.	420,000
	To Billings on construction in process a/c		420,000
	Cash a/c Dr.	350,000
	To Accounts receivables a/c		350,000
	Construction in process a/c Dr.	240,000
	Construction expenses a/c Dr.	640,000
	To Revenue from long-term contract a/c		880,000

Working notes:

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

$\begin{array}{rcl}\mathbf{Percentage}\mathbf{-}\mathbf{of}\mathbf{-}\mathbf{completion}& \mathbf{=}& \frac{\mathbf{Cost}\mathbf{}\mathbf{incurred}}{\mathbf{Total}\mathbf{}\mathbf{cost}}\mathbf{\times }\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{400}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{100}\\ & \mathbf{=}& \mathbf{40}\mathbf{\%}\end{array}$

$\begin{array}{rcl}\mathbf{Construction}\mathbf{}\mathbf{in}\mathbf{}\mathbf{process}& \mathbf{=}& \left(\mathrm{Contract}\mathrm{price}-\mathrm{Total}\mathrm{cost}\right)\mathbf{\times }\mathbf{Percentage}\mathbf{-}\mathbf{of}\mathbf{-}\mathbf{completion}\\ & \mathbf{=}& \left(\$2,200,000-\$1,600,000\right)\mathbf{\times }\mathbf{40}\mathbf{\%}\\ & \mathbf{=}& \mathbf{\$}\mathbf{600}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{40}}{\mathbf{100}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{240}\mathbf{,}\mathbf{000}\end{array}$