Question 5.5 (Total: 34 marks)

The board of directors for Apache Construction Corp. is meeting to choose between the completed-contract 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 Apaches controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information:

Apache commenced doing business on January 1, 2020.

Construction activities for the year ended December 31, 2020, were as follows:

Project

Total contract

Price

Billings through

12/31/20

Cash collections through

12/31/20

A

$ 615,000

$ 340,000

$ 310,000

B

450,000

135,000

135,000

C

475,000

475,000

390,000

D

600,000

240,000

160,000

E

480,000

400,000

400,000

$ 2,620,000

$ 1,590,000

$ 1,395,000

Project

Contract costs incurred through 12/31/20

Estimated additional costs to complete contracts

A

$ 510,000

$ 120,000

B

130,000

260,000

C

350,000

-0-

D

370,000

290,000

E

320,000

80,000

$ 1,680,000

$ 750,000

Each contract is with a different customer.

Any work remaining to be done on the contracts is expected to be completed in 2021.

Required

1. Prepare a schedule by project, calculating the amount of gross profit (or loss) for the 2020 calendar year, which would be reported under:

a. The completed-contract method.

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

2. Prepare the general journal entry to record revenue and gross profit on project B for 2020, assuming that the percentage-of-completion method is used.

3. Indicate the balances that would appear in the statement of financial position at December 31, 2020 for the following accounts for Project D, assuming that the percentage-of-completion method is used.

a. Accounts Receivable

b. Billings on Construction in Process

c. Construction in Process

How would the balances in the accounts discussed in part 3 above change (if at all) for Project D, if the completed-contract method is used?