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Hi Another71ers:
I understand all by reading answers, but this is cheating !
I try to understand the logic or reasoning behind this. How am I suppose to or what kind of path I should follow when I see the following questions. Perhaps, journal entires?
Thank you !
In 2014, Steinrotter Construction Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Steinrotter uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2014, are shown below.
Balance Sheet
Account Receivable $18,000
Construction in Process $65,000
Less: Billings $61,500
Costs and Recognized profit in excess of billings $3,500
Income Statement
Income(before tax) on the contract recognized in 2014 $19,500
(a) How much cash was collected in 2014 on this contract?
Contract billings to date $61,500
Less: Accounts receivable 12/31/14 18,000
Portion of contract billings collected $43,50
(b) What was the initial estimated total income before tax on this contract?
$19,500/$65,000 = 30%
(The ratio of gross profit to revenue recognized in 2014.)
$1,000,000 X .30 = $300,000
(The initial estimated total gross profit before tax on the contract.)
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