Question
The board of directors of Novak Construction Company is meeting to choose between the completed-contract method and the percentage-of-completion method of accounting for long-term contracts
The board of directors of Novak Construction Company 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 Novak's controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information:
1. | Novak commenced doing business on January 1, 2021. | |||||||||||
2. | Construction activities for the year ended December 31, 2021, were as follows: | |||||||||||
Project | Total Contract Price | Billings Through 12/31/21 | Cash Collections Through 12/31/21 | Contract Costs Incurred Through 12/31/21 | Estimated Additional Costs to Complete Contracts | |||||||
A | $ 513,000 | $ 353,000 | $ 323,000 | $ 437,000 | $ 114,000 | |||||||
B | 733,000 | 223,000 | 223,000 | 214,500 | 500,500 | |||||||
C | 481,500 | 488,000 | 403,000 | 363,000 | -0- | |||||||
D | 206,500 | 113,000 | 71,500 | 136,000 | 110,000 | |||||||
E | 463,000 | 413,000 | 413,000 | 333,000 | 83,250 | |||||||
$2,397,000 | $1,590,000 | $1,433,500 | $1,483,500 | $807,750 | ||||||||
3. | Each contract is with a different customer. | |||||||||||
4. | Any work remaining to be done on the contracts is expected to be completed in 2022. |
Part 1
Compute the amount of income (or loss) before selling, general, and administrative expenses for the year ended December 31, 2021, which would be reported under:
(1) | The completed-contract method. | $ | ||
(2) | The percentage-of-completion method (based on estimated costs). | $ |
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Part 2
Prepare the general journal entry to record revenue and gross profit on project B (second project) for 2021, assuming that the percentage-of-completion method is used. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation | Debit | Credit |
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Part 3
Indicate the balances that would appear in the balance sheet at December 31, 2021 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 | $ |
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Part 4
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?
If the completed-contract method is used the account balances would decreasewould be the samewould increase. |
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