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: 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: 1) 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 entity's performance and the customer's payment." 2) 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. Questions (total 6 Points, with 1 extra point question at the end): 1. Calculate the Gross Profit booked in Year 1. ( 0.5 points each, total 1 point) a. Please show your calculation, if any, along with the numeric result. b. Please support (justify) your answer with quoting from FASB codification. 2. 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. (Total 1.5 points. 0.25 points will be taken for every JE is mistaken, or every incorrect element indication.) a. Record costs incurred b. Record billings on contract c. Record payments received d. Record revenue/cost during construction period 3. How will the construction project be shown on balance sheet at the end of Year 1 ? ( 0.5 points each, total 1.5 points.) a. Please show your calculation of the balance of the project. b. Which section the balance belongs to? Please choose from the follows i. Assets ii. Liabilities iii. Equity iv. Revenue v. Expense c. Please briefly explain why you choose what you choose. Quote relevant FASB Codification to support your answer. 4. Answer the following questions (Total 1point): a. What is the gross profit recognized in Year 3 ? ( 0.25 points each, total 0.5 points) i. Please show your calculation with your calculation results ii. Please quote FASB codification to justify your answer. (Hint: when should you recognize gross profit or loss?) b. What is the final journal entry for Year 3 , assuming all the amounts as originally stated? Please select account names from accounts provided in Appendix. Please indicate the element of each account you use. (Hint: there will be two pairs of debits and credits, i.e., two journal entries. 0.25 points each, total 0.5 points.) i. Entry 1 ii. Entry 2 5. Extra Credit Question: assume that the total estimated costs are $3,000,000 in Year 2 . All other amounts remain the same as above. What is the gross profit recognized in Year 2 under this new assumption? (0.5 points each, total 1 extra point.) a. Please show your calculation with your calculation results b. Please quote FASB codification to justify your answer. (Hint: under the completed contract method, when should you recognize gross profit or loss?) 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