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

(a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.

(b) Prepare all necessary journal entries for 2018.

(c) Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used.

Short answer

Gross profit for 2017, 2018, 2019 are $0, $0, $530,000 respectively.

Step-by-step solution

Meaning of Long-Term Contract

When you sign a long-term contract with someone else, you agree to work for them 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 as the future unfolds.

Gross profit for each year by the completed-contract method

Because the contract has not yet been finished, there will be no profit in 2017 and 2018. However, the profit in 2019 will be $530,000, which is the contract price less the cost incurred.

$\begin{array}{rcl}\mathrm{Gross}\mathrm{profit}\mathrm{in}2019& =& \mathrm{Contract}\mathrm{price}-\mathrm{Cost}\mathrm{incurred}\mathrm{in}2019\\ & =& \$1,600,000-\$1,070,000\\ & =& \$530,000\end{array}$