Accounting for long-term construction contracts-Revenue Recognition-MG

The board of directors of Ogle Construction Company is meeting to choose between the cost-recovery method and the percentage-of-completion method of accounting for long-term contracts in the company's financial statements. You have been engaged to assist Ogle's controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information:

1. Ogle commenced doing business on January 1, 2018.

2. Construction activities for the year ended December 31, 2018, were as follows:

Total Contract Billings Through Cash Collections

Project Price 12/31/18 Through 12/31/18

A 500,000 340,000 310,000

B 720,000 210,000 210,000

C 475,000 475,000 390,000

D 200,000 100,000 65,000

E 450,000 400,000 400,000

2,345,000 1,525,000 1,375,000

Contract Costs Estimated

Incurred Through Additional Costs to

Project 12/31/18 Complete Contracts

A 424,000 101,000

B 195,000 455,000

C 350,000 -0-

D 123,000 97,000

E 320,000 80,000

1,412,000 733,000

3. Each contract is with a different customer.

4. Any work remaining to be done on the contracts is expected to be completed in 2019.

Instructions

(a) Prepare a schedule by project, computing the amount of income (or loss) before selling, general, and administrative expenses for the year ended December 31, 2018, which would be reported under:

(1) The cost-recovery method.

(2) The percentage-of-completion method (based on estimated costs).

(b) Prepare the general journal entry(ies) to record revenue and gross profit on project B (second project) for 2018, assuming that the percentage-of-completion method is used.

(c) Indicate the balances that would appear in the statement of financial position at December 31, 2018 for the following accounts for Project D (fourth project), assuming that the percentage-of-completion method is used.

Accounts Receivable

Billings on Construction in Process

Construction in Process

(d) How would the balances in the accounts discussed in part (c) change (if at all) for Project D (fourth project), if the completed-contract method is used?