Question

At the beginning of 2014, the Jensen Construction Company signed a contract with the state of Florida to build a highway for $6 million. The project is estimated to be completed by the end of 2016. Jensen will bill the state in installments over the construction period per a schedule in the contract. Information related to the contract is as follows:


For each of the following independent requirements, assume collection of all billings and recovery of costs are probable.

Required:
1. Because the highway is being built in an area with very stable soils, Jensen believes it is able to reasonably estimate the contract’s completion costs and thus uses the percentage-of-completion method of accounting for this contract. Prepare the journal entry that Jensen would make at the end of each year to appropriately recognize the revenue, expense, and profit on the project for that year.
2. Because the highway is being built in an area with very unstable soils, Jensen believes it is not able to reasonably estimate the contract’s completion costs and thus uses the completed-contract method of accounting (U.S. GAAP) for this contract. Prepare the journal entry that Jensen would make at the end of each year to appropriately recognize the revenue, expense, and profit on the project for that year.
3. Because the highway is being built in an area with very unstable soils, Jensen believes it is not able to reasonably estimate the contract’s completion costs and thus uses the cost-recovery method of accounting (IFRS) for this contract. Prepare the journal entry that Jensen would make at the end of each year to appropriately recognize revenue, expense, and profit on the project for that year.
4. How would the solution to the three requirements above change if the contract-based revenue recognition principles proposed in the recent IASB/FASB exposure draft on revenue recognition are adopted? Assume that the entire contract is viewed as a single unit of accounting.



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  • CreatedSeptember 10, 2014
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