1. Percentage of Completion Example Paterno Construction receives a contract for $1.5 million Renovation to Beaver Stadium Through 1997, 1998, and 1999

2. 1997 Costs Incurred: $350,000 When materials are purchased and costs are incurred, we transfer the balance to a work-in-process inventory account called Construction-in-Progress Basic Journal Entries for Transactions

3. The Journal Entry to do this transfer might look like: 1997 Costs Incurred: $350,000 Constr In Progr Inv.350,000 Transferring costs to CIP account. Basic Journal Entries for Transactions

4. Materials Inv.200,000 Wages Payable80,000 Cash70,000 Constr In Progr Inv.350,000 The Journal Entry to do this transfer might look like: 1997 Costs Incurred: $350,000 Actual costs incurred in the year. Basic Journal Entries for Transactions

5. T-Account Summary CIP Inv 350,000

6. Basic Journal Entries for Transactions When the company bills for work in progress, it records an accounts receivable for the amount of the billing and a corresponding contra-asset account called Billings on Construction. Billings on Construction is a contra-asset account because it reduces the amount of Construction-in-Progress inventory that the firm can claim is theirs. In other words, it is as if the firm is transferring the rights to ownership of a portion of Construction-in-Progress inventory in exchange for an increase in accounts receivable.

7. 11/30 Accounts Rec.300,000 Billings on Constr 300,000 Example: On Nov. 30, the company mails a bill for $300,000. Basic Journal Entries for Transactions

8. T-Account Summary 1997 Balance Sheet Representation: Assets: Constr in Prog Inv350,000 Less: Billings on Construct(300,000) Net CIP Inventory50,000 CIP Inv 350,000 Billings on Constr 300,000

9. Example: On Dec. 10, the company receives cash for the bill: 12/10 Cash300,000 Accounts Rec. 300,000 Basic Journal Entries for Transactions When the company actually receives payment on the recent billing, it simply records the cash in exchange for the accounts receivable.

10. Computing Revenue under Percentage of Completion Start with 1997 data for costs incurred and estimated total completion costs.

11. Percent Complete = 350,000/1,350,000 = 25.926% 1997 Costs Incurred to-date: $350,000 Estimated Total Costs:$1,350,000 Computing Revenue under Percentage of Completion Revenue = Percent Complete x Total Revenue for Project - Prior Revenue Recognized Revenue 1997 = (0.25926 x $1,500,000) - $0 = $388,890

12. Computing Revenue under Percentage of Completion Now, compute for 1998. Assume expected completion costs increase to $1,360,000 due to budget overruns.

13. Revenue 1998 = (0.66176 x $1,500,000) - $388,890 Revenue = Percent Complete x Total Revenue for Project - Prior Revenue Recognized Percent Complete = 900,000/1,360,000 = 66.176% 1998 Costs Incurred to-date: $900,000 Estimated Total Costs:$1,360,000 Computing Revenue under Percentage of Completion = $603,750 Note that this is cumulative (this includes the $350,000 costs incurred in 1997 and an additional $550,000 incurred in 1998).

14. Computing Revenue under Percentage of Completion Now, compute for 1999. Assume actual completion costs increase to $1,365,000 due to budget overruns.

15. = $507,360 Revenue 1999 = (1 x $1,500,000) - $388,890 - $603,750 Revenue = Percent Complete x Total Revenue for Project - Prior Revenue Recognized Percent Complete = 1,365,000/1,365,000 = 100% 1999 Costs Incurred to-date: $1,365,000 Estimated Total Costs:$1,365,000 Computing Revenue under Percentage of Completion

16. Summary of Project YearCosts Incurred Expected Total Costs %age completed Revenue 1997 1998 1999 Totals

17. Summary of Project YearCosts Incurred Expected Total Costs %age completed Revenue 1997350,0001,350,00025.926$388,890 1998 1999 Totals

18. Summary of Project YearCosts Incurred Expected Total Costs %age completed Revenue 1997350,0001,350,00025.926$388,890 1998550,0001,360,00066.176$603,750 1999 Totals

19. Summary of Project YearCosts Incurred Expected Total Costs %age completed Revenue 1997350,0001,350,00025.926$388,890 1998550,0001,360,00066.176$603,750 1999465,0001,365,000100$507,360 Totals

20. Summary of Project YearCosts Incurred Expected Total Costs %age completed Revenue 1997350,0001,350,00025.926$388,890 1998550,0001,360,00066.176$603,750 1999465,0001,365,000100$507,360 Totals1,365,000$1,500,000

21. Annual Journal Entries to Record Revenue and Gross Profit YearCosts Incurred Expected Total Costs %age completed Revenue 1997350,0001,350,00025.926$388,890

22. Annual Journal Entries to Record Revenue and Gross Profit YearCosts Incurred Expected Total Costs %age completed Revenue 1997350,0001,350,00025.926$388,890 1997 End-of-Year Journal Entry: Construction Expense350,000 Construction Revenue 388,890

23. Annual Journal Entries to Record Revenue and Gross Profit YearCosts Incurred Expected Total Costs %age completed Revenue 1997350,0001,350,00025.926$388,890 1997 End-of-Year Journal Entry: Construction Expense350,000 Constr In Prog Inv38,890 Construction Revenue 388,890 Gross profit goes to CIP Inventory Account

24. 1997 T-Account Summary CIP Inv 350,000 38,890 Billings on Constr 300,000 Actual Costs Gross Profit

25. CIP Inv 350,000 38,890 Billings on Constr 300,000 1997 Balance 388,890 300,000 1997 T-Account Summary

26. 1998 End-of-Year Journal Entry: Construction Expense550,000 Construction Revenue 603,750 Annual Journal Entries to Record Revenue and Gross Profit YearCosts Incurred Expected Total Costs %age completed Revenue 1998550,0001,360,00066.176$603,750

27. 1998 End-of-Year Journal Entry: Construction Expense550,000 Constr In Prog Inv53,750 Construction Revenue 603,750 Annual Journal Entries to Record Revenue and Gross Profit YearCosts Incurred Expected Total Costs %age completed Revenue 1998550,0001,360,00066.176$603,750

28. 1999 End-of-Year Journal Entry: Construction Expense465,000 Constr In Prog Inv42,360 Construction Revenue 507,360 Annual Journal Entries to Record Revenue and Gross Profit YearCosts Incurred Expected Total Costs %age completed Revenue 1999465,0001,365,000100$507,360

29. CIP InvBillings on Constr End of Project T-Account Summary $1,500,000

30. CIP InvBillings on Constr End of Project T-Account Summary $1,500,000 This is the amount we will have billed the client through the project life. This includes all costs incurred through the project plus all gross profit on the project.

31. CIP InvBillings on Constr End of Project T-Account Summary $1,500,000 Billings on Constr 1,500,000 CIP Inv 1,500,000 Closing Journal Entry (to zero out accounts):

32. Losses on Long-Term Contracts There are two situations for losses: 1)Loss only in current period When current years expenses > current years revenues. But the total project will still be profitable. 2)Unprofitable total contract When new estimates of total contract costs > expected total revenues.

33. Losses on Long-Term Contracts Loss only in current period Example: 1998 expected total costs increase to $1,450,000 (Note that the total contract is still profitable since we will collect $1,500,000)

34. Losses on Long-Term Contracts Loss only in current period Example: 1998 expected total costs increase to $1,450,000 YearCosts Incurred Expected Total Costs %age completed Revenue 1997350,0001,350,00025.926$388,890 1998550,0001,450,00062$542,145 900,000 / 1,450,000 = 62% 0.62 x 1,500,000 = $931,035 – 388,890 = $542,145

35. Losses on Long-Term Contracts Loss only in current period Example: 1998 expected total costs increase to $1,450,000 YearCosts Incurred Expected Total Costs %age completed Revenue 1997350,0001,350,00025.926$388,890 1998550,0001,450,00062$542,145 Notice costs incurred > Current period revenue 550,000 542,145

36. Losses on Long-Term Contracts Loss only in current period Journal entry: Construction Expenses 550,000 CIP Inventory (Loss)7,855 Construction Revenue542,145 Notice costs incurred > Current period revenue 550,000 542,145

37. Losses on Long-Term Contracts Unprofitable Total Contract Example: 1998 expected total costs increase to $1,600,000 Note that the total contract is no longer profitable since we will collect only $1,500,000. So, we anticipate a $100,000 loss. We must recognize this anticipated loss on the entire project in the year we first discover the expected loss (in this case, 1998). To do this, we do the following: 1. Compute the revenue for the year using same method as before. 2. Reverse any prior recorded profits and record the anticipated loss.

38. Losses on Long-Term Contracts Unprofitable Total Contract Example: 1998 expected total costs increase to $1,600,000 YearCosts Incurred Expected Total Costs %age completed Revenue 1997350,0001,350,00025.926$388,890 1998550,0001,600,00056.25$454,860 900,000 / 1,600,000 = 56.25% 0.5625 x 1,500,000 = $843,750 – 388,890 = $454,860 Compute Revenue for the Year Note also that we recorded $388,890 - $350,000 = $38,890 Gross Profit in 1997.

39. 1998 Journal entry: Losses on Long-Term Contracts Unprofitable Total Contract Example: 1998 expected total costs increase to $1,600,000 Construction Revenue 454,860 Record the revenue for the year CIP Inventory (loss) 138,890 Record the $100,000 loss + reverse the 1997 Gross Profit Construction Exps 593,750