During 2020, Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2022. The following information is available.

2014 2015 2016
Costs incurred to date $400,000 $825,000 $1070,000
Estimated costs to complete 600,000 275,000 0
Billings to date 300,000 900,000 1600,000
Collections to date 270,000 810,000 14,25000

Required:
a. Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.
b. Prepare all necessary journal entries for 2015
c. Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used.

Explanation:

a. Gross profit in 2014:

Contract price = $1,600,000

Costs = $400,000 + $600,000 = $1,000,000

400,000/1,000,000= 40%

$1,600,000 - $1,000,000 = $600,000

$600,000*40% = $240,000

Gross profit in 2015:

Contract price = $1,600,000

Costs = $825,000 + $275,000 = $1,100,000

825,000/1,100,000= 75%

$1,600,000 - $1,100,000 = $500,000

$500,000*75% = $375,000

Gross profit = 375,000 - 240,000 = $135,000

Gross profit in 2016:

Contract price = $1,600,000

Costs = $1070,000

$1,600,000 - $1,070,000 = $530,000

Gross profit = 530,000 - 240,000 - 135,000 = $155,000

b.

Journal entries:

Dr Construction in process 425,000

Cr Materials, Cash, Payables, etc 425,000

*($825,000 -400,000)

Dr Accounts Receivable 600,000**

Cr Billing on construction in process 600,000

**($ 900,000-300,000)

Dr Construction expenses 425,000

Dr Construction in Process 135,000

Cr Revenue from Long-Term Contracts 560,000***

***(1,600,000 x (75% - 40%))

c.

2014 $0

2015 $0

2016 $530,000

Gross Profit Recognized in 2016:

Gross profit $1,600,000-1070,000 = $530,000

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