QUESTION 2 Revenue Recoanition (28 points plus 3 bonus points) In 2017, Chicago

Question

QUESTION 2 Revenue Recoanition (28 points plus 3 bonus points) In 2017, Chicago Construction began work on a three-year con struction p roject to build a new performing arts com plex (the "PAC"). Chicago uses the percentage-of-completion method of accounting. At the end of 2017, the company completed 25% of the project. The following financial aformation indicates the results to date for the PAC at the end of 2017: Actual Cost incurred in 2017 Construction in progress (as of 12/31/2017) Accounts Receivable from construction billings (as of 12/31/2017) $35 million $50 million $60 million Additional information: As of 12/31/2017, management's the estimate of total cost indicates that project will be profitable. Zero cash regarding the billings on the construc 2017. ction has been collected in. e journal entry to record revenue, cost of goods sold from the construction for the year 2017 and journal entry to

Explanation / Answer

Percentage Completed = Actual Cost Incurred Till Date / Estimated Total Cost

==> 25% = 35 Million / Estimated Cost to Completion

==> Estimated Cost to Completion = 35 / 25% = $140 Million (2)

Same with Contract Price

==> Contract Price = billings / % of completion = 60/25% = $240 Million (3)

(4)

Construction in Progress $50 Millions

Accounts Receivable $60 Millions

a.)

Cost of Goods Sold A/c Dr $35 Millions

To Bank A/c $35 Millions

Accounts Receivable A/c Dr $60 Millions

To Revenue A/c $60 Millions

(5)

Year 2

Cost Incurred = $60 Million

Cost to Completion = $ 142.5 Millions

Contract Cost = 35 + 60 + 142.5 = $237.5 Millions

COGS to recognise = % completed * 237.5 Millions

e.)

Note Par Value = $100,000

Period = 6 months

Effective Interest Rate = 8% p.a

So present value = 100,000/1.04 = $96,153.85

Journal Entry

Notes Receivable A/c Dr $96,153.85

To Sales A/c $96,153.85

And on Dec 31

Notes Receivable A/c Dr $1,885.37

To Interest A/c $1,885.37

[On December 31, present value would be calculated for 3 months at 2% so 100,000/1.02 = 98,039.22

And it's principal is 96,153.85 and the interest income is $1,885.37]

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