1. BE.18.2, Shock Wave Inc began work on $ 7,000,000 contract in 2005 to construct an office building. During 2005, Shock Wave Inc, incurred costs of $ 1,715,000, billed their customers for $ 1,200,000 and collected $ 960,000. At December 31, 2005, the estimated future costs to complete the project total $ 3,185,000. Prepare Shock Wave’s 2005 journal entries using the percentage of completion method. BE.18.4, Use the information above, but assume Shock Wave uses the completed contract method. Prepare the company’s 2005 journal entries. Exercise 1, 2

2. Construction in Process 1,715,000 Materials, Cash, Payables, etc.1,715,000 Accounts Receivable 1,200,000 Billings on Construction in Process1,200,000 Cash 960,000 Accounts Receivable960,000 Construction in Process 735,000 Construction Expenses 1,715,000 Revenue from Long-term Contract 2,450,000 [($ 1,715,000 ÷ $ 4,900,000) x $ 2,100,000 = $ 735,000] Answer of Exercise 1

3. Construction in Process1,715,000 Materials, Cash, Payables, etc. 1,715,000 Accounts Receivable 1,200,000 Billings on Construction in Process 1,200,000 Cash 960,000 Accounts Receivable960,000 Answer of Exercise 2

4. BE.18.10, Yogi Bear Co sold equipment to Magilla Co for $ 20,000. The equipment is on Yogi’s books at a net amount of $ 14,000. Yogi collected $ 10,000 in 2004, $ 5,000 in 2005 and $ 5,000 in 2006. If Yogi uses the cost recovery method, what amount of gross profit will be recognized in each year ?. Exercise 3

5. 2004 $ 0 2005 $ 1,000 ($ 15,000 – $ 14,000) 2006 $ 5,000 Answer of Exercise 3

6. E.18.6, On April 1, 2004, Brad Bridgewater Inc entered into a cost plus fixed free contract to construct an electric generator for Tom Dolan Co. At the contract date, Bridgewater estimated that it would take 2 years to complete the project at a cost of $ 2,000,000. The fixed free stipulated in the contract is $ 450,000. Bridgewater appropriately accounts for this contract under the percentage of completion method. During 2004, Bridgewater incurred costs of $ 700,000 related to the project. The estimated cost at December 31, 2004, to complete the contract is $ 1,300,000. Dolan was billed $ 600,000 under the contract. Instructions : Prepare a schedule to compute the amount of gross profit to be recognized by Bridgewater under the contract for the year ended December 31, 2004. Show the supporting computations in good form. Exercise 4

7. Computation of Gross Profit to Be Recognized on Uncompleted Contract Year Ended December 31, 2004 Total contract price Estimated contract cost at completion$ 2,000,000 ($ 700,000 + $ 1,300,000) Fixed fee $ 450,000 Total $ 2,450,000 Total estimated cost $ 2,000,000 Gross profit $ 450,000 Percentage of completion ($ 700,000 ÷ $ 2,000,000) 35 % Gross profit to be recognized ($ 450,000 x 35 %) $ 157,500 Answer of Exercise 4