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Chapter 18

Pr. 3. Long-term construction project accounting.

Dobson construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of completion method of revenue recognition since, given the characteristics of the contractor’s business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost-to-cost basis. Dobson began work on a lump-sum contract at the beginning of 2015. As bid, the statistics were as follows

 

Lump-sum price (contract price)                                                                              4,000,000

Estimated costs

Labor                                                              $ 850,000

Materials and subcontractor                         1,750,000

Indirect costs                                                   400,000                                           3,000,000

                                                                                                                                 $1,000,000

 

At the end of the first year, the following was the status of the contract:

 

Billings to date                                                                                                          $2,250,000

Costs incurred to date

Labor                                                  $ 464,000

Materials and subcontractor                648,000

Indirect costs                                       184,000                                            1305,000

Latest forecast total cost                                                                                           3,000,000

 

It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered in the costs incurred to date.

Instruction

 

a     Compute the percentage of completion on the contract at the end of 2015

b     Indicate the amount of gross profit that would be reported on this contract at the end of 2015.

c      Make the journal entry to record the income (loss) for 2015 on Dobson's books.

d     Indicate the account(s) and the amount(s) that would be shown on the balance sheet of Dobson Construction at the end of 2015 related to its construction accounts. Also indicate where these items would be classified on the balance sheet. Billings collected during the year amounted to $1,900,000.

e     (e) Assume the latest forecast on total costs at the end of 2015 was $4,060,000. How much income (loss) would Dobson report for the year 2015?

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