LONG TERM CONTRACTS

Percentage of Completion Method

Percent complete = Cost incurred the date : Most recent estimate of total costs

Percent complete X Estimated total revenue (or gross profit) = Revenue (gross profit) to be recognized to date

Revenue (or gross profit) to be recognized to date - Revenue (or gross profit) recognized in prior periods = current period revenue (or gross profit)

Example:

Hardhat Company has a contract to construct a $4.500.000 bridge at an estimated cost of 4.000.000. The contract is to start in July 20X0, and the bridge is to be completed
in October 20X2. The following data pertain to the construction period (at the end of 20X1, Hardhat has revised the estimated total cost from 4.000.000 to 4.050.000):

20X0 20X1 20X2

Cost to date 1.000.000 2.916.000 4.050.000
Estimated cost to complete 3.000.000 1.134.000 -
Progress billings during the year 900.000 2.400.000 1.200.000
Cash collected during the year 750.000 1.750.000 2.000.000

Hardhat would compute the percentage complete:

20X0 20X1 20X2

Contract price 4.500.000 4.500.000 4.500.000
Less estimated cost:
Cost to date 1.000.000 2.916.000 4.050.000
Estimated cost to complete 3.000.000 1.134.000 -
Estimated total costs 4.000.000 4.050.000 4.050.000

Estimated total gross profit 500.000 450.000 450.000

Percent complete 25% 72% 100%
1.000.000:4.000.000 2.916.000:4.050.000 4.050.000:4.050.000
 20X0 20X1 20X2
Cost to date 1.000.000 2.916.000 4.050.000
Estimated cost to complete 3.000.000 1.134.000 -
Progress billings during the year 900.000 2.400.000 1.200.000
Cash collected during the year 750.000 1.750.000 2.000.000

Journal Entries:

20X0 20X1 20X2

To record cost of construction:
Construction in process 1.000.000 1.916.000 1.134.000
Materials, cash, payable, etc 1.000.000 1.916.000 1.134.000

To record progress billings:

Accounts receivable 900.000 2.400.000 1.200.000
Billings on Construction in Process 900.000 2.400.000 1.200.000

To record collections:
Cash 750.000 1.750.000 2.000.000
Accounts Receivable 750.000 1.750.000 2.000.000
Revenue, cost and gross profit:

To date Recognized in Recognized in

prior years current year
20X0
Revenues (4.500.000X25%) 1.125.000 - 1.125.000
Costs 1.000.000 - 1.000.000
Gross profit 125.000 - 125.000

20X1
Revenues (4.500.000X72%) 3.240.000 1.125.000 2.115.000
Costs 2.916.000 1.000.000 1.916.000
Gross profit 324.000 125.000 199.000

20X2
Revenues (4.500.000X100%) 4.500.000 3.240.000 1.260.000
Costs 4.050.000 2.916.000 1.134.000
Gross profit 450.000 324.000 126.000

Journal entries:

20X0 20X1 20X2

To recognize revenue and gross profit:
Construction in process 125.000 199.000 126.000
Construction expenses 1.000.000 1.916.000 1.134.000
Revenue from long term contracts 1.125.000 2.115.000 1.260.000

To record completion of the contract:

Billings on Construction in Process 4.500.000
Construction in Process 4.500.000

Kuis: BE 18-8

Tugas: E 18-13