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Problem 139 The board of directors of Ogle Construction Company is meeting to choose between the completed-contract method and the percentage-of-completion method of accounting for long-term contracts in the company’s financial statements. You have been engaged to assist Ogle’s controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information: 1. Ogle commenced doing business on January 1, 2018 2. Construction activities for the year ended December 31, 2018, were as follows: Contract Costs Estimated Total Contract Billings Through Cash Collections Incurred Through Additional Costs to 12/31/18 Through 12/31/18 12/31/18 Complete Contracts 95,000 434,000 Project Price 494,000 714,000 472,000 197,000 444,000 $2,321,000 $334,000 204,000 469,000 94,000 394,000 $1,495,000 $304,000 204,000 384,000 62,000 394,000 $1,348,000 418,000 186,000 344,000 117,000 314,000 $1,379,000 91,000 78,500 $698,500 3. Each contract is with a different customer 4. Any work remaining to be done on the contracts is expected to be completed in 2019 Compute the amount of income (or loss) before selling, general, and administrative expenses for the year ended December 31, 2018, which would be reported under: (1) The completed-contract method (2) The percentage-of-completion method (based on estimated costs)
Expert Answer
SOLUTION
1.
| Projects | A | B | C | D | E |
| Contract price (1) | 494,000 | 714,000 | 472,000 | 197,000 | 444,000 |
| Contract costs incurred | 418,000 | 186,000 | 344,000 | 117,000 | 314,000 |
| Additional Costs to complete | 95,000 | 434,000 | 0 | 91,000 | 78,500 |
| Total cost (2) | 513,000 | 620,000 | 344,000 | 208,000 | 392,500 |
| Total gross profit or (loss) (1-2) | (19,000) | 94,000 | 128,000 | (11,000) | 51,500 |
a-The amount reported as income (loss) under the completed-contract method for 2018 is:
| Project A | (19,000) |
| Project B | 0 |
| Project C | 128,000 |
| Project D | (11,000) |
| Project E | 0 |
| 98,000 |
b-The amount reported as income (loss) under the percentage-of-completion method for 2018 is:
| Project A | (19,000) |
| Project B (94,000*186,000/620,000) | 28,200 |
| Project C | 128,000 |
| Project D | (11,000) |
| Project E (51,500*314,000/392,500) | 41,200 |
| 167,400 |
2.
| Accounts title and Explanation | Debit ($) | Credit ($) |
| Construction in Process | 28,200 | |
| Construction Expenses | 186,000 | |
| Revenue from Long-term Contracts | 214,200 |
3.
| Particulars | Amount ($) |
| Billings | 94,000 |
| Cash collections | 62,000 |
| Accounts receivable | 32,000 |
| Billings on Construction in Process | 100,000 |
| Costs incurred | 117,000 |
| Loss reported | (11,000) |
| Construction in process | 106,000 |
4.
The account balances would be the same.
