Stoney Construction Co. enters a 3-year contract to build a new warehouse facility. Stoney follows Completed Contract Method under U.S. GAAP and adopts progress billing accounting for its construction project. Information for Years 1, 2, and 3 is shown below:

	Year 1	Year 2	Year 3
Sales price	$ 2,800,000	$ 2,800,000	$ 2,800,000
Estimated costs	$ 1,600,000	$ 2,000,000	$ 2,000,000
Costs incurred to date (paid in cash)	$ 400,000	$ 900,000	$ 2,000,000
Billed to date	$ 250,000	$ 1,150,000	$ 2,800,000
Received in cash to date	$ 190,000	$ 950,000	$ 2,800,000

Notes:

Sales price refers to total sales price for the whole warehouse facility, and estimated costs refer to the total estimated costs of this project. According to the table above, the total contract price remains the same (never amended) during the 3 years contracting period, but total costs estimation increased in Year 2.

Costs incurred to date refers to the accumulated costs the company spent on building the facility at the end of each year. Such costs are also referred to as costs to fulfill a contract.

Billed to date refers to how much the company has billed its customer for the facility they are building so far.

Received in cash to date is the accumulated amount the company has received from its customer.

You will be asked to support your booking / reporting decisions by quoting related FASB Codification. When quote the codification, please follow the following steps:

Provide the full code followed by the full related narrative following the code. For example, you may start your statement by:

According to ASC 606-10-45-1 When either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or a contract liability, depending on the relationship between the entitys performance and the customers payment.

After quoting the codification, you may need to briefly explain the relevancy of your quotes, i.e., how this codification affects your posting or reporting decision. There must be a clear logic link between your quote and your reporting decisions. If such logical connection is missing, you will lose points to the question.

a/ Calculate the Gross Profit booked in Year 1.

Please show your calculation, if any, along with the numeric result.

Please support (justify) your answer with quoting from FASB codification.

b/ Prepare each of the following required journal entries (if any) for Year 1 using completed contract method (U.S. GAAP). Please show your calculation (if any) and indicate the element of each account you use. Please select account names from the provided list in Appendix.

Record costs incurred

Record billings on contract

Record payments received

Record revenue/cost during construction period

Appendix: List of Account Names

Cash

Cash in advance

Construction in progress

Construction expense

Contracts payable

Contracts receivable

Customer advance

Income summary

Prepaid expense

Progress billings

Revenue

Unearned revenue