Exercise 6-38

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).

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

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.

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

		2020		2021		2022
Gross profit / (loss)		$		$		$

Prepare the journal entries for 2020 and 2021. (Use Materials, Cash, Payables for costs incurred to date.) For Year 2020:

Account Titles and Explanation	Debit	Credit
(To record cost of construction)
(To record progress billings)
(To record collections)
(To record revenues)
(To record construction expenses)

For Year 2021:

Account Titles and Explanation	Debit	Credit
(To record cost of construction)
(To record progress billings)
(To record collections)
(To record revenues)
(To record construction expenses)

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

		December 31, 2020		December 31, 2021
Balance in the Contract Asset/Liability account		$		$

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