Question

Archer Construction Company began work on a \(420,000 construction contract in 2017. During 2017, Archer incurred costs of \)278,000, billed its customer for \(215,000, and collected \)175,000. At December 31, 2017, the estimated additional costs to complete the project total $162,000. Prepare Archer’s journal entry to record profit or loss, if any, using (a) the percentage-of-completion method and (b) the completed-contract method.

Short answer

Loss is incurred from this contract.

Step-by-step solution

Meaning of Completed-Contract Method

It is an accounting approach that allows companies to postpone revenue and expense reporting until the completion of a contract.

Journal entries with percentage-of-completion and completed-contract method  

Value of project = $420,000

Cost incurred = $278,000

Amount collected = $175,000

$$\begin{gathered} \mathrm{Profit}/\mathrm{Loss}\mathrm{incurred}\mathrm{from}\mathrm{contract}=\mathrm{Value}\mathrm{of}\mathrm{project}-\mathrm{Cost}\mathrm{incurred}-\mathrm{Amount}\mathrm{collected} \\ =\$420,000-\$278,000-\$175,000 \\ =\left(\$33,000\right) \end{gathered}$$Loss of ($33,000) incurred from this contract.

$$\begin{gathered} \mathrm{Revenue}=\mathrm{Cost}\mathrm{incurred}-\mathrm{Loss}\mathrm{incurred}\mathrm{from}\mathrm{contract} \\ =\$278,000-\$33,000 \\ =\$245,000 \end{gathered}$$

Date	Particular	Debit ($)	Credit ($)
	Cost expended a/c W	278,000
	To Loss a/c		33,000
	To Revenue from contract a/c		245,000

$$\begin{gathered} \mathrm{Total}\mathrm{cost}=\mathrm{Cost}\mathrm{incurred}+\mathrm{Amount}\mathrm{collected} \\ =\$278,000+\$175,000 \\ =\$453,000 \end{gathered}$$

$$\begin{gathered} \mathrm{Percent}\mathrm{complete}=\frac{\mathrm{Cost}\mathrm{incurred}}{\mathrm{Total}\mathrm{Cost}}\times 100 \\ =\frac{\$278,000}{\$453,000}\times 100 \\ =61·36\% \end{gathered}$$

$$\begin{gathered} \mathrm{Recognizable}\mathrm{Revenue}=\mathrm{Value}\mathrm{of}\mathrm{contract}\times \mathrm{Percent}\mathrm{complete} \\ =\$420,000\times \frac{61·36}{100} \\ =\$257,712 \end{gathered}$$

$$\begin{gathered} \mathrm{Profit}/\mathrm{Loss}\mathrm{incurred}\mathrm{from}\mathrm{Contract}=\mathrm{Revenue}\mathrm{recognize}-\mathrm{Cost}\mathrm{incurred} \\ =\$257,712-\$278,000 \\ =\left(\$20,288\right) \end{gathered}$$

From this contract, a loss of ($20,288) is incurred..

Date	Particular	Debit ($)	Credit ($)
	Cost expended a/c	278,000
	To Revenue from contract a/c		257,712
	To Loss a/c		20,288