Revenue on Long-Term Contracts
Easy Test
Easy Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
a. as cash is collected
b. as billings occur
c. when revenue is recorded over time
d. when revenue is recorded upon delivery
Answer
2. The term “estimated cost to complete” means
a. the total cost of the contract
b. total costs that have been incurred to date
c. total costs yet to be incurred
d. total expenses yet to be incurred
Answer
a. 2
b. 3
c. 4
d. 1
Answer
a. billings
b. construction expense
c. construction in profit
d. both a. and c.
Answer
a. incurred during the period
b. paid for expenses during the period
c. billed to the customer during the period
d. the customer owes the contractor
Answer
a. construction revenue
b. construction in process
c. construction expense
d. construction profits
Answer
a. total billings to the customer
b. total costs incurred to date plus profit or loss earned to date
c. total work performed
d. total work performed that has been billed to the customer
Answer
a. the amount of profit can not be reliably estimated
b. the amount of profit is not certain until the contract is complete
c. the customer is not billed and does not pay until the contract is complete
d. all of the above
Answer
a. construction in process and billings and total contract revenue
b. construction expense, costs incurred, and billings
c. billings and accounts receivable
d. construction expense and construction revenue
Answer
A. All of the items stated in a. will be equal to the total contract price for the project. Accounts receivable will not be equal to billings when the customer makes payments. Construction expense and construction revenue will not be equal when there is profit or loss.
a. cash
b. construction expense
c. billings
d. construction in process
Answer
Year 1 | Year 2 | |
Costs incurred during the year | $ 1,350,000 | $ 500,000 |
Estimated costs to complete on 12/31 | $ 600,000 | $ 0 |
Billings during the year | $ 1,250,000 | $ 750,000 |
Collections during the year | $ 1,200,000 | $ 800,000 |
A. Prepare a table that calculates the amount of income or loss to be recognized for the first and second years of the contract.
B. Prepare all journal entries required for the first and second years of the contract.
Answer
Contract Price | $2,000,000 | $2,000,000 |
Cost to Date (cumulative) | $1,350,000 | $1,850,000 |
+ Estimated Cost to Complete (from this point to the end) | $ 600,000 | $ 0 |
= Total Cost | $1,950,000 | $1,850,000 |
= Estimated Income (Price – Total Cost) | $ 50,000 | $ 150,000 |
x Estimated % Complete (cost to date divided by total cost) | .6923 | .100 |
= Estimated income to record to date (Estimated income x % complete) |
$ 34,615 | $ 150,000 |
– Less cumulative income recorded in all previous years | $ 0 | $ (34,615) |
= Income to record this period | $ 34,615 | $ 115,385 |
11. B. Journal Entries – 1st Year:
As costs are incurred:
Construction in Process (CIP) 1,350,000
A/P, cash, etc. 1,350,000
As the customer is billed:
Accounts Receivable 1,250,000
Billings (liability) 1,250,000
As payment is collected from the customer:
Cash 1,200,000
Accounts Receivable 1,200,000
At the end of the period to record revenue earned:
Construction Expense 1,350,000
Construction in Process 34,615
Construction Revenue 1,384,615
Construction Expense is equal to the amount incurred during this period
CIP is the amount computed as income this period (from the table).
A debit is a profit and a credit is a loss
Construction Revenue is a plug to balance the journal entry.
11. B. Journal Entries – 2nd Year:
As costs are incurred:
Construction in Process (CIP) 500,000
A/P, cash, etc. 500,000
As the customer is billed:
Accounts Receivable 750,000
Billings (liability) 750,000
As payment is collected from the customer:
Cash 800,000
Accounts Receivable 800,000
At the end of the period to record revenue earned:
Construction Expense 500,000
CIP 115,385
Construction Revenue 615,385
Construction Expense is equal to the amount incurred during this period
CIP is the amount computed as income this period (from the table)
Construction Revenue is a plug to balance the journal entry
At the end of the period the contract is completed:
Billings 2,000,000
Construction in Process 2,000,000
This will make billings and construction in process equal 0.
The amount it takes to 0 them out is always equal to the total contract price.
Year 1 | Year 2 | |
Costs incurred during the year | $ 3,300,000 | $3,100,000 |
Estimated costs to complete on 12/31 | $ 2,100,000 | $ 0 |
Billings during the year | $ 2,250,000 | $3,750,000 |
Collections during the year | $ 2,000,000 | $4,000,000 |
A. Prepare a table that calculates the amount of income or loss to be recognized for the first and second.
B. Prepare all journal entries required for the first and second year.
C. Record the journal entry(ies) that would be different given the company cannot estimate costs to be incurred.
Answer
Contract Price | $6,000,000 | $6,000,000 |
Cost to Date (cumulative) | $3,300,000 | $6,400,000 |
+ Estimated Cost to Complete (from this point to the end) | $2,100,000 | $ 0 |
= Total Cost | $5,400,000 | $6,400,000 |
= Estimated Income (Price – Total Cost) | $ 600,000 | $ (400,000) |
x Estimated % Complete (cost to date divided by total cost) | .6111 | .100 |
= Estimated income to record to date (Estimated income x % complete) |
$ 366,660 | $ (400,000) |
– Less cumulative income recorded in all previous years | $ 0 | $ (366,660) |
= Income to record this period | $ 366,660 | $ (766,660) |
12. B. Journal Entries – 1st Year:
As costs are incurred:
Construction in Process (CIP) 3,300,000
A/P, cash, etc. 3,300,000
As the customer is billed:
Accounts Receivable 2,250,000
Billings (liability) 2,250,000
As payment is collected from the customer:
Cash 2,000,000
Accounts Receivable 2,000,000
At the end of the period to record revenue earned:
Construction Expense 3,300,000
CIP 366,660
Construction Revenue 3,666,660
Construction Expense is equal to the amount incurred during this period
CIP is the amount computed as income this period (from the table).
A debit is profit and a credit is a loss
Construction Revenue is a plug to balance the journal entry
12. B. Journal Entries – 2nd Year:
As costs are incurred:
Construction in Process (CIP) 3,100,000
A/P, cash, etc. 3,100,000
As the customer is billed:
Accounts Receivable 3,750,000
Billings (liability) 3,750,000
As payment is collected from the customer:
Cash 4,000,000
Accounts Receivable 4,000,000
At the end of the period to record revenue earned:
Construction Expense 3,100,000
Construction In Process 766,660
Construction Revenue 2,333,340
Construction Expense is equal to the amount incurred during this period
CIP is the amount computed as income this period (from the table)
Construction Revenue is a plug to balance the journal entry
At the end of the period the contract is completed:
Billings 6,000,000
Construction in Process 6,000,000
This will make billings and construction in process equal 0.
The amount it takes to 0 them out is always the total contract price.
12. C. Entries when recognizing revenue upon delivery:
The first 3 entries for both years are the same.
The entry to close out billings and construction in process is the same.
Construction revenue and construction expense is only recorded at the end of the second year when the contract is completed for the total amount.
Construction Expense 6,400,000
Construction In Process 400,000
Construction Revenue 6,000,000
Year 1 | Year 2 | |
Costs incurred during the year | $ 2,350,000 | $3,100,000 |
Estimated costs to complete on 12/31 | $ ? | $ 0 |
Billings during the year | $ 2,000,000 | $3,000,000 |
Collections during the year | $ 1,500,000 | $3,500,000 |
Record all journal entries required for year 1 and year 2.
Answer
13. Journal Entries – 1st Year:
As costs are incurred:
Construction in Process (CIP) 2,350,000
A/P, cash, etc. 2,350,000
As the customer is billed:
Accounts Receivable 2,000,000
Billings (liability) 2,000,000
As payment is collected from the customer:
Cash 1,500,000
Accounts Receivable 1,500,000
Do not record construction revenue or construction expense.
13. Journal Entries – 2nd Year:
As costs are incurred:
Construction in Process (CIP) 3,100,000
A/P, cash, etc. 3,100,000
As the customer is billed:
Accounts Receivable 3,000,000
Billings (liability) 3,000,000
As payment is collected from the customer:
Cash 3,500,000
Accounts Receivable 3,500,000
At the end of the 2nd year record total revenue earned and total expenses incurred for the entire contract:
Construction Expense 5,450,000
CIP 450,000
Construction Revenue 5,000,000
Construction Expense is equal to total expenses incurred for the contract
CIP is the total amount of profit on the contract
Construction Revenue is the total contract price
At the end of the 2nd year after the asset is delivered:
Billings 5,000,000
Construction in Process 5,000,000
Makes billings and construction in process equal 0.
The amount is always the total contract price.