Chapter 18 Homework

The following information relates to a long term construction project of the

Feldbrand Corporation:

Year 1 Year 2 Year 3

Costs to date 50,000 120,000 200,000
Billings to date 40,000 130,000 250,000
Cash collections to date 40,000 120,000 250,000
Estimated costs
To complete 140,000 80,000

Assume a contract price of $ 250,000. Prepare journal entries and a partial

balance sheet for each year under:
a. The completed contract method
b. The percentage of completion method.

Aspen enters into a contract for $ 840,000. The following data is available:

Year 1 Year 2 Year 3

Costs incurred during the year 320,000 260,000 145,000
Estimated costs to complete 320,000 145,000 0

How much profit/loss should be recognized each year under:

a. The completed contract method
b. The percentage of completion method

Long-term contract accounting (completed-contract).

Ponce Construction, Inc. experienced the following construction activity in
2008, the first year of operations.
Cash Cost Estimated
Total Billings Collections Incurred Additional
Contract through through through Costs to
Contract Price 12/31/08 12/31/08 12/31/08 Complete
X $260,000 $165,000 $155,000 $182,000 $ 63,000
Y 330,000 115,000 115,000 100,000 247,000
Z 233,000 233,000 198,000 158,000 -0-
$823,000 $513,000 $468,000 $440,000 $310,000

Each of the above contracts is with a different customer, and any work
remaining at December 31, 2008 is expected to be completed in 2009.
Instructions
Prepare a partial income statement and a partial balance sheet to indicate
how the above contract information would be reported. Ponce uses the
completed-contract method.

Company C uses the percentage of completion method for construction

projects. During Years 1 and 2, it incurred costs of $ 10,000 and $ 20,000
respectively, and it expects to incur another $40,000 in the future. In Year 1,
it recognized $ 5,000 profit. The total contract price is $ 150,000. How
much profit should they recognize in Year 2?
If Company C uses the completed contract method, how much profit should
they recognize in Year 1 and Year 2?
In Year 3, Company C determines that it will make a loss of $ 50,000. How
much gain or loss should Company C recognize in Year 3 under each of the
two methods?

The contract price was $ 2,000,000. The percentage of completion method

is used. The following financial statement information follow for Year 1:

Balance Sheet:
Accounts Receivable $ 43,000
Const. In Progress $ 130,000
Less: Billings $ 123,000

Const in excess of billings $ 7,000

Income Statement:
Income recognized in 2007 $ 36,400

a. How much cash was collected on this contract in Year 1?

b. What was the initial estimated total income before tax on this contract?

S&W Metals Inc. had the following information regarding its installment
sales for Year 1 and Year 2. Prepare journal entries for both years.
Year 1 Year 2
Sales 300,000 500,000
COGS 180,000 350,000
Collection on Year 1 Sales 140,000 160,000
Collection on Year 2 Sales 0 400,000
A customer’s AR balance is $ 30,000 and the Gross Profit percentage is
20% on sales. The customer defaults, and the merchandise, having a fair
market value of $ 27,000 is repossessed. What is the gain or loss on this
transaction?

The Very Poor Company is involved in making installment sales whose

probability of collection is extremely low. So it uses the cost recovery
method. Information for two years of installment sales is as follows:

Year 1 Year 2
Sales 50,000 80,000
COGS 35,000 60,000
Collection of Year 1 sales 25,000 15,000
Collection of Year 2 sales 0 40,000

How much profit should be recognized each year?