Question

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 –0–

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(b) Prepare all necessary journal entries for 2018.

Short answer

Revenue from long-term contract is $560,000.

Step-by-step solution

Meaning of Long-Term Contract

A long-term contractis when you commit to working for someone else for an extended period of time. Because the parties will never need to amend or renegotiate the contract as the future unfolds, a long-term contract is also considered complete.

Journal entries for 2018

Date	Particular	Debit ($)	Credit ($)
	Construction in process a/c	425,000
	Materials, cash, payables, etc. a/c		425,000
	Accounts receivables a/c	600,000
	Billing on construction in process a/c		600,000
	Construction expenses a/c	425,000
	Construction in process a/c	135,000
	Revenue from long term contract a/c		560,000

Working Notes:

$\begin{array}{rcl}\mathrm{Material}\mathrm{cash},\mathrm{payables}\mathrm{etc}& =& \mathrm{Cost}\mathrm{incurred}\mathrm{in}2018-\mathrm{Cost}\mathrm{incurred}\mathrm{in}2018\\ & =& \$825,000-\$400,000\\ & =& \$425,000\end{array}$

$\begin{array}{rcl}\mathrm{Account}\mathrm{receivables}& =& \mathrm{Billing}\mathrm{to}\mathrm{date}2018-\mathrm{Billing}\mathrm{to}\mathrm{date}\mathrm{in}2017\\ & =& \$900,000-\$300,000\\ & =& \$600,000\end{array}$

$\begin{array}{rcl}\mathrm{Revenue}& =& (\mathrm{Contract}\mathrm{price}\times \mathrm{Percentage}\mathrm{of}\mathrm{completion}\mathrm{in}2018)-(\mathrm{Contract}\mathrm{price}\times \mathrm{Percentage}\mathrm{of}\mathrm{completion}\mathrm{in}2017)\\ & =& (\$1,600,000\times 75\%)-(\$1,600,000\times 40\%)\\ & =& (1,200,000-\$640,000)\\ & =& \$560,000\end{array}$