Background for the Shopping Center contract

Bailey Construction, Inc. contracts to build a shopping center in a multi-year project for a customer with a contract price of $10M and an initial cost estimate of $7.5M. The contract specifies the following (output-based) milestones for assessing progress:

10% - Site cleared and waste removed

20% - Ground preparation (grading) complete

36% - Concrete building foundation complete

48% - Building framework and utility service complete

67% - Building exterior complete

84% - Building interior complete

100% - Paving, landscaping and signs complete

First, lets look at an overview of values for the full 3-year project. To simplify our example well express all amounts in thousands of dollars. Progress billings will be made on a monthly schedule. Following are the key amounts for this project:

Contract price (revenue for complete project)	$10,000
Initial estimated cost for the complete project	7,500
	Initially	Yr #1	Yr #2	Yr #3	Total
Costs incurred during construction		$3,000	$4,000	$1,400	$8,400
Updated estimated cost to complete the project	7,500	5,000	1,500	0	0
Amounts billed to the customer		2,750	5,750	1,500	10,000
Amounts collected (in cash) from the customer		2,000	4,000	4,000	10,000

During the first fiscal year of Baileys construction project, the following events occur and are recorded in journal entries (this is a summarized version):

$3,000k of construction costs were incurred (labor, materials, services) concrete foundation was completed dr Construction in Progress (CIP) 3,000k cr Cash (and/or Payables) 3,000k

The project manager estimates the remaining cost to complete the project is $5,000k (total cost est. now $8,000k)

$2,750k was billed to the customer dr Accounts Receivable 2,750k cr Billings on Contract 2,750k

$2,000k of cash is collected from the customer dr Cash 2,000k cr Accounts Receivable 2,000k

Note: these are all asset or contra-asset accounts there is no impact on the Income Statement by any of these routine entries

Revenue Recognition at a Point in Time:

Lets assume that Bailey has determined that this project does not satisfy any of the three criterion identified in ASU 2014-09 for recognizing revenue over a period of time, so revenue will be recognized at a point in time. In this case, no revenue or expense is recognized on the income statement until the construction project is completed and costs are known. Construction costs, billing activities, and cash collection during the construction project are still tracked in balance sheet accounts (CIP, Billings, and A/R) described above.

Requirements:

When should revenue be recognized?

What are the journal entries you should make at the completion of the project in Year 3?

What line items (with amounts) related to this project would appear on the Year 1 Balance Sheet (assuming this is the only long-term project) ignore Cash and Retained Earnings?

Assets: Liabilities:

What line items (with amounts) related to this project would appear on the Year 1 Income Statement (assuming this is the only long-term project)?

Revenues: Expenses:

What line items (with amounts) related to this project would appear on the Year 2 Balance Sheet (assuming this is the only long-term project) ignore Cash and Retained Earnings?

Assets: Liabilities:

What line items (with amounts) related to this project would appear on the Year 2 Income Statement (assuming this is the only long-term project)?

Revenues: Expenses:

What line items (with amounts) related to this project would appear on the Year 3 Balance Sheet (assuming this is the only long-term project) ignore Cash and Retained Earnings?

Assets: Liabilities:

What line items (with amounts) related to this project would appear on the Year 3 Income Statement (assuming this is the only long-term project)?

Revenues: Expenses: