In early 2003, Skyline Corp. won a contract to build a rapid transit line connecting downtown Vancouver to the airport and the suburb of Richmond (the RAV line). The contract was for $1.9 billion to be received over the construction period of six years, ending in November 2009. Skyline has a December 31 year-end and uses the percentage of completion method to account for long-term contracts.
Required:
a. Skyline’s management expects the gross margin on the total project to be 20%, and that $228 million would be incurred on the project by December 31, 2003.
i. How much gross profit (or loss) will Skyline record in the 2003 fiscal year if management’s estimates are accurate?
ii. Provide the journal entry to record revenue, cost of goods sold, and expected loss (if applicable) for fiscal 2003.
b. Assume that it is now early 2007 and you are preparing the adjusting entries for 2006. The accounting records indicate that, by the end of 2005, a total of $760 million in revenue and $684 million in cost of goods sold had been recorded. You also know that $380 million in costs were incurred on the project in 2006, and management’s best estimates indicate another $912 million in costs will be required to complete the project.
i. How much gross profit (or loss) should Skyline record in the 2006 fiscal year if management’s estimates are accurate?
ii. Provide the journal entry' to record revenue, cost of goods sold, and expected loss (if applicable) for fiscal year 2006.