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23-08-2018

Product code: Accounts-AW394

# PROBLEM #1 (10 points)

Brittle Construction, Inc., entered into a fixed-price contract with Trumpet Company on July 1, 2016, to construct a four-story office building. At that time, Brittle estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is \$4,000,000. Brittle concludes that the contract does not qualify for revenue recognition over time. The building was completed on December 31, 2018. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Trumpet under the contract were as follows:

 At 12-31-2016 At 12-31-2017 At 12-31-2018 Percentage of completion 10% 60% 100% Costs incurred to date \$ 350,000 \$2,500,000 \$4,250,000 Estimated costs to complete 3,150,000 1,700,000 –0– Billings to Trumpet, to date 720,000 2,170,000 3,600,000

PART A: Assume the contract qualifies for recognizing revenue over time.

1. How much revenue will be recognized in each of the years?
2. Prepare the necessary journal entries that would be recorded for revenue recognition in each of the years. (If no entry, note “no entry”.)
3. Prepare the balance sheet related journal entries for each of the years.
4. What amount would be recorded as the contract asset or liability at the end of each of the years?

PART B: Assume the contract does NOT quality for recognizing revenue over time.

1. How much revenue will be recognized in each of the years?
2. Prepare the necessary journal entries that would be recorded for revenue recognition in each of the years. (If no entry, note “no entry”.)
3. Prepare the balance sheet related journal entries for each of the years.
4. What amount would be recorded as the contract asset or liability at the end of each of the years?

# PROBLEM #2 (20 points)

Robust Builders, Inc., builds office buildings and single-family homes. The office buildings are constructed under contract with reputable buyers. The homes are constructed in developments ranging from 10–20 homes and are typically sold during construction or soon after. To secure the home upon completion, buyers must pay a deposit of 10% of the price of the home with the remaining balance due upon completion of the house and transfer of title. Failure to pay the full amount results in forfeiture of the down payment. Occasionally, homes remain unsold for as long as three months after construction. In these situations, sales price reductions are used to promote the sale.

During 2016, Robust began construction of an office building for Coral Corporation. The total contract price is \$20 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows:

 2016 2017 2018 Costs incurred during the year \$ 4,000,000 \$ 9,500,000 \$4,500,000 Estimated costs to complete as of year-end 12,000,000 4,500,000 — Billings during the year 2,000,000 10,000,000 8,000,000 Cash collections during the year 1,800,000 8,600,000 9,600,000

Also during 2016, Robust began a development consisting of 12 identical homes. Robust estimated that each home will sell for \$600,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2016 and paid for in full for \$600,000 each by the buyers. The completed homes cost \$450,000 each to construct. The construction costs incurred during 2016 for the nine uncompleted homes totaled \$2,700,000.

# PROBLEM #2 (continued)

PART A: Assume the contract qualifies for recognizing revenue over time.

1. How much revenue will be recognized in each of the years?
2. Prepare the necessary journal entries that would be recorded for revenue recognition in each of the years. (If no entry, note “no entry”.)
3. Prepare the balance sheet related journal entries for each of the years.
4. What amount would be recorded as the contract asset or liability at the end of each of the years?

PART B: Assume the contract does NOT quality for recognizing revenue over time.

1. How much revenue will be recognized in each of the years?
2. Prepare the necessary journal entries that would be recorded for revenue recognition in each of the years. (If no entry, note “no entry”.)
3. Prepare the balance sheet related journal entries for each of the years.
4. What amount would be recorded as the contract asset or liability at the end of each of the years?

PART C: Assume the same information for 2016 and 2017, but that as of year-end 2017 the estimated cost to complete the office building is \$9,000,000. All other information remains the same.

Assume the contract qualifies for recognizing revenue over time.

1. How much revenue will be recognized in 2017 and 2018?
2. Prepare the necessary journal entries that would be recorded for revenue recognition in 2017 and 2018. (If no entry, note “no entry”.)
3. Prepare the balance sheet related journal entries for 2017 and 2018.
4. What amount would be recorded as the contract asset or liability at the end of 2017?

PART D: Assume the same information for 2016 and 2017, but that as of year-end 2017 the estimated cost to complete the office building is \$9,000,000.  All other information remains the same.

Assume the contract does NOT quality for recognizing revenue over time.

1. How much revenue will be recognized in 2017 and 2018?
2. Prepare the necessary journal entries that would be recorded for revenue recognition in 2017 and 2018. (If no entry, note “no entry”.)
3. Prepare the balance sheet related journal entries for 2017 and 2018.
4. What amount would be recorded as the contract asset or liability at the end of 2017?

1) Total Revenue 20000000 Revenue Recognized Year Percentage Completion Cumulative Revenue Revenue Recognized 2016 22% 4444444.444 0 2017 75% 15000000 0

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