Assume the facts given in E6.37 except now assume that the construction industry has experienced significant expansion, making construction materials and labour more costly than originally estimated. Vaughn finds it extremely difficult to estimate the costs to complete construction and therefore difficult to estimate the percent complete.It must account for the construction project using the zero-profit method.

Instructions

a. Calculate the amount of the gross profit to be recognized each year of the contract.

b. Prepare the journal entries for 2020 and 2021.

c. What is the balance in the Contract Asset/Liability account at December 31, 2020 and 2021?

d. Show how the construction contract would be reported on the SFP and the income statement for the year ended December 31, 2021.

E6.37

Vaughn Enterprises Ltd. has entered into a contract beginning in February 2020 to build two warehouses for Atlantis Structures Ltd. The contract is a non-cancellable fixed price contract for $10 million. The following data pertain to the construction period (all figures in thousands).

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2021 2022 2020 Costs for the year Estimated costs to complete Progress billings for the year (non-refundable) Cash collected for the year $3,825 4,675 3,500 3,100 $4,675 1,270 4,100 4,150 $1,200 -0- 2,400 2,750