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Clemson ACCT 3110 - Example Problem Solution (Ch. 5 Note Packet)

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1a. Revenue is recognized over time Construction revenue = (Contract price/Total Revenue x Percent Completed) - PY Revenue Recognized Percent Completed = Total Actual Costs So Far Total Costs to Complete (Actual + Estimated) Construction costs = Actual costs incurred during the year (unless you need to plug for an overall loss) Gross profit/loss = CY Revenue – CY Costs (unless there is a loss situation) 2018 Revenue = 8,000,000 x (1,500,000/6,000,000) = 8,000,000 x 25% = 2,000,000 Costs = 1,500,000 Gross Profit = 2,000,000 – 1,500,000 = 500,000 2019 Revenue = 8,000,000 x (6,000,000/7,500,000) = 8,000,000 x 80% = 6,400,000 – 2,000,000 = 4,400,000 Costs = 4,500,000 Gross Profit = 4,400,000 – 4,500,000 = (100,000) OR think about it overall: 6,400,000 revenue to date – 6,000,000 actual costs to date = 400,000 gross profit  already recorded 500,000 GP in 2018 so we would need to reduce this by 100,000 to get to a GP of 400,000 2020 Revenue = 8,000,000 – 2,000,000 – 4,400,000 = 1,600,000 Costs = 1,550,000 Gross Profit = 1,600,000 – 1,550,000 = 50,000 OR Total GP = Total Revenue – Total Costs = 8,000,000 – 7,550,000 = 450,000 and at the end of 2019 we had recorded 400,000 of GP so 50,000 more is needed in 2020 1b. Revenue is recognized upon completion 2018 and 2019 No revenue, no construction costs (expense), no gross profit 2020 Revenue = 8,000,000 Costs = 7,550,000 Gross Profit = 8,000,000 – 7,550,000 = 450,0002. Journal Entries for revenue recognized over time 2018 Construction in Progress (CIP) 1,500,000 Cash or A/P 1,500,000 Accounts Receivable 1,400,000 Billings on Construction Contract 1,400,000 Cash 1,000,000 Accounts Receivable 1,000,000 Construction in Progress (CIP) 500,000 Cost of Construction 1,500,000 Construction Revenue 2,000,000 2019 Construction in Progress (CIP) 4,500,000 Cash or A/P 4,500,000 Accounts Receivable 5,200,000 Billings on Construction Contract 5,200,000 Cash 4,000,000 Accounts Receivable 4,000,000 Cost of Construction 4,500,000 Construction Revenue 4,400,000 Construction in Progress (CIP) 100,000 2020 Construction in Progress (CIP) 1,550,000 Cash or A/P 1,550,000 Accounts Receivable 1,400,000 Billings on Construction Contract 1,400,000 Cash 3,000,000 Accounts Receivable 3,000,000 Construction in Progress (CIP) 50,000 Cost of Construction 1,550,000 Construction Revenue


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