Construction Accounting
The Pierson Construction Corporation contracted with the City of Plaquemine to construct a dam on the bayou at a price of $14,000,000. Pierson expects to earn $1,270,000 on the contract. The percentage of completion method is to be used, and the completion stage is to be determined by estimates made by the engineer. The following schedule summarizes the activities of the contract for the years 2007–2009.
|
|
Cost |
Engineer’s Estimated |
Estimate of |
Billings |
Collection |
|
Year |
Incurred |
Cost to Complete |
Completion |
on Contract |
on Billings |
|
2007 |
$4,300,000 |
$8,560,000 |
33% |
$4,000,000 |
$3,600,000 |
|
2008 |
4,100,000 |
4,700,000 |
62 |
5,000,000 |
5,100,000 |
|
2009 |
4,550,000 |
0 |
100 |
5,000,000 |
5,300,000 |
Instructions:
1. Prepare a schedule showing the revenue, cost, and the gross profit earned each year under the percentage of completion method, using the engineer’s estimate as the measure of completion to be applied to revenues and costs.
2. Prepare all journal entries required to reflect the contract.
3. Prepare journal entries for 2009, assuming the completed contract method is used.
4. How would the journal entries in (2) differ if the actual costs incurred were used to calculate cost for the period instead of the engineer’s estimate?