Big Construction Company signs a contract on 1 July 2023, agreeing to build a warehouse for Buyer
Question:
Big Construction Company signs a contract on 1 July 2023, agreeing to build a warehouse for Buyer Corporation Ltd at a fixed contract price of $10 million. Buyer Ltd will be in control of the asset throughout the construction process. Big Construction Company estimates that construction costs will be as follows:
2023 $2.5 million
2024 $4 million
2025 $1.5 million
The contract provides that Buyer Corporation Ltd will make payments on 31 December each year as follows:
2023 $2 million
2024 $5 million
2025 $3 million
The contract is completed and accepted on 31 December 2025. Assume that actual costs and cash collections coincide with expectations and that cost (an input measure) is used as the basis for assessing progress on the construction contract. Big Construction Company has a financial year ending 31 December.
REQUIRED
Provide the journal entries for 2023, 2024 and 2025, assuming that:
a. The level of progress on the contract can be reliably estimated
b. The level of progress on the contract cannot be reliably estimated.
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