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Hi Tutor,
Appreciate your help to guide me to do the journal entries (for the year ended 31 December 20X5) for the question below.
Question: A company entered into a contract on 1 January 20X5 to build a factory. The total contract revenue was $2.8 million. At 31 December 20X5 the contract was certified as 35% complete. Costs incurred during the year were $740,000 and costs to complete are estimated at $1.4 million. $700,000 has been billed to the customer but not yet paid.
My attempt:
Dr Contract Asset $271000 (SFP Non-current asset)
Dr Account Receivables $700000 (SFP)
Cr Retained Earnings $231000 (SFP)
Cr Cash $740000 (SFP)Hi Student
My attempt is:
$700,000 Receivable
$530,000 Current Asset (the equivalent of unbilled work in progress)
$980,000 contract revenue
$490,000 costs recognised (in cost of sales)
(and therefore profit of $490,000 recognised)
What does the answer say?
This is a MCQ in the BPP revision kit. The answer is a contract asset of $271000 in the SOFP. I presume this is the amount due from the customer.
Contract cost to date $740000
Add: Profit recognised $231000
Selling Price $971000
Amount billed $700000
Contract Asset $271000I don’t have the answer for the journal entries, hence I wanted to learn how the transactions will be treated to balance the books if this type of question were to appear in a question on published financial statements.
In trying to understand your entries, I’m trying to derive your answers as below:
$700,000 Receivable ($700,000 has been billed to the customer but not yet paid.)
$530,000 Current Asset (How to get this?)
$980,000 contract revenue (35% of contract revenue)
$490,000 costs recognised (35% of cost to complete)
Ok, I have taken the detail “costs to complete are estimated at $1.4 million” whereas I should have realised that this was “further costs to complete” rather than “total costs to complete”
On the basis of it being “further costs to complete” I agree those answers that you have given. If you can understand how the BPP figures have been arrived at, then you can understand how mine have been derived.
In answer to your original post, the debits and credits that you are looking for would be:
Dr Contract Account $740,000
Cr Cash $740,000
Dr Contract Account $980,000
Cr Profit or Loss $980,000 Revenue
Cr Contract Account $749,000
Dr Profit or Loss $749,000 Cost of Sales
Dr Receivables $700,000 (invoiced)
Cr Contract Account $700,000
That leaves:
a balance on the Contract Account of $271,000,
a balance on Receivables of $700,000,
and $231,000 profit recognised in Profit or Loss
Ok?
Incidentally, if you put these figures into the workings that I show you in the course notes and video lectures, you would have found them easy!
Hi mike
Is my reasoning OK?
Journal entry
Dr. cost of sales 749
Dr. Profit recognized 231
CD. Revenue 980Dr. Rbles 700
Cr . contract account 700
Sopl
Rev + 980
Cost of sales + 749Sofp rbles + 700
But why should the profit be debited?
Why should profit be debited? Because your reasoning is at fault!
Check out my double entries above (and open a “Contract Costs Account” to help you)
What about the balance on the contract account that you appear to have ignored?
What’s the problem with following the journal entries that I have written out? They are correct so, if you arrive at the same conclusion, it would appear that you too have landed on the correct solution.
If you don’t arrive at the same conclusion, then your logic is incorrect.
But, even if you DO arrive at the same conclusion by some other circuitous route, the way I have posted is the correct way to get to the solution
Hi Mike,
When I was trying to work out the profit recognised, I had calculated it as follows
2.8m x 35% = 980
P specific (740)
1.4m x 35% (490)
Loss (250)Why did they not get a percentage of the revenue and total costs?
Am I reading the question wrong?I think I may see where I am looking at it wrong, I thought $740k was period specific but it just looks like that is costs incurred to date not actual period specific costs.
Agreed! The problem is that, if it’s not made perfectly clear, it can so easily be misunderstood
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