Essan Construction Inc., which has a calendar year end, has entered into a non-cancellable fixed price contract for $2.8 million beginning September 1, 2020, to build a road for a municipality. It has been estimated that the road construction will be complete by June 2022. The following data pertain to the construction period.

Instructions

a. Using the percentage-of-completion method, calculate the estimated gross profit that would be recognized during each year of the construction period. Round the percent complete to the nearest whole percentage point.

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 statement of financial position (SFP) and the income statement for the year ended December 31, 2021.

e. Using the zero-profit method, repeat part (a).

f. Using the zero-profit method, repeat part (b).

g. Using the zero-profit method, repeat part (c).

h. Using the zero-profit method, repeat part (d).

i. Prepare a table comparing the gross profit recognized in each of the three years under (1) the percentage-of-completion method, (2) the zero-profit method, and (3) the completed-contract method.

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2020 2021 2022 Costs to date Estimated costs to complete Progress billings to date (non-refundable) Cash collected to date $1,800,000 $2,350,000 1,700,000 850,000 700,000 -0- 2,800,000 2,800,000 2,300,000 2,200,000