[Anonymous]

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.)

[CPAchiever]

Write doing the j/e and formulas if you can memorize them.

a) record billing:

Dr: Contract Receivable 61,500

Cr: Progress billing 61,500

record cash received ( they did not collect all the cash in 2014, therefore subtract A/R from the billing amount)

Dr: Cash 43,500

Cr: Contract Receivable 43,500

b) Cost incurred to date / Total Estimated cost = % completed

% completed * contract price = gross profit

Costs go in the I/S —-> Hence, $19,500 is cost incurred to date

[Anonymous]

Hi CPAchiever

I appreciate your reply, so you are saying that

“Billings $61,500” is sort of accrual revenue as following:

On December 31, 2013

Account Receivable************************$61,500

Revenue (Billings or Invoice)***************$61,500

On December 31, 2014

Account Receivable************************ $18,000

Hence, my understanding is

On December 31, 2013, $61,500 is the account receivable that RECOGNIZED.

On December 31, 2014, $18,000 is remaining account receivable that will collected in 2015.

$18,000-$61,500 = – $43,500 is collected (Dr. Cash Cr Account Receivable)

I am struggling with Cash to Accrual questions , so I can think kind of crazy when solve problem.

Thank you

[CPAchiever]

the billing is accrued based on the % completed during that period. $61,500 must be recognized in the period earned. However, the question asked how much $ was “collected” not “earned”. Hence, you subtract A/R from the billing amount and the difference is cash collected.

[TheGuyCPA]

This reminds me of how brutal FAR was to study for…. so glad I'm done. SIGH~ :).

But in my experience, the actual exam questions were much simpler than the questions in review programs.

FAR - 80
REG - 78
AUD - 88
BEC - 84

State of Illinois Licensed CPA as of September 2015

[Missy]

One very dangerous habit of test takers is to add/assume/embellish the question. Above you wrote:

On December 31, 2013

Account Receivable************************$61,500

Revenue (Billings or Invoice)***************$61,500

On December 31, 2014

Account Receivable************************ $18,000

Nowhere in the does it give an AR balance of 61,500 on Dec 31,2013. And even if the question DID give a balance in A/R at 12/31/13 and 12/31/14 you couldn't calculate cash collected from those balances without also knowing how much in sales went to AR during that period.

This is not a cash to accrual problem, it is very important to be able to differentiate. This is absolutely accrual method accounting and has nothing to do with cash basis.

Also important to remember is that revenue is an income statement account and accounts receivable is a balance sheet account so the two accounts have a relationship but mean very different things.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Anonymous]

Hi mla11692

I know what you mean, trying to eliminate it, sign~

Thanks

[Author]

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