Hey aatoural,
The CIP portion of the JE represents the amount of current year profit that is recognized on a project.
For example, if at the beginning of we assume that the estimated revenues for a project is 200,000 and the estimate costs is 100,000. The revenue, expense, and CIP are calculated as follows:
Step 1: determine the costs incurred to date. Let's say it was 50,000 of costs incurred.
Step 2: Determine if there are any additional costs to be incurred.
Note: This is where the exam will definitely try to trick you. If a question reads something like “XYZ company incurred costs of 50,000 to date and the costs to complete will be another 50,000” just know that you need to take the costs incurred to date divided by the costs incurrrd to date plus the costs to complete to get your percentage of completion. If an exam question says “costs at completion” just know that your total cost for the project will already include the cost recognized to date.
Step 3: Once you know your costs incurred to date and the costs it will take to complete the project, you'll be able to generate your JE. Continuing from the numbers in step two, let's say that the costs incurred to date was 50,000 and the additional cost to complete is another 50,000. We then know that the contract is 50% completed. We can then plug-in our JE as follows:
CIP: [(200000-100000) * .50] = 50,000
Construction expense: 100,000 * .50 = 50,000
Revenue: 200,000 * .5 = 100,000
Another thing to note, in future periods when calculating the CIP, construction expense, and revenues, once you've determined the amounts as of the subsequent balance sheet date, you'll need to back out the amounts recognized in the prior period.
So in my prior example, if at the end of the following year, we incurred costs to date of 60,000 and the costs to complete will be another 40,000 then we will have completed 60% of the project. The new amounts will be determined as follows:
CIP: [(200,000 – 100,000) * .60]: 60,00 less previously recognized CIP of 50,000 = 10,000
Expense: 100,000 * .60: 60,000 less previously recognized expense of 50,000 = 10,000
Revenue: 200,000 * .60: 120,000 less previously recognized revenue of 100,000 = 20,000
Essentially on subsequent reporting dates you're “truing up” the CIP, expense, and revenues recognized in prior periods to what they should be as of the current period's reporting date.
Hope I've been of help and didn't make it more complicated.
.