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Hutton Construction specializes in the construction of commercial and
industrial buildings. The contractor is experienced in bidding
long-term construction projects of this type, with the typical project
lasting fifteen to twenty-four months. The contractor uses the
percentage-of-completion method of revenue recognition since, given the
characteristics of the contractor’s business and contracts, it is the
most appropriate method. Progress toward completion is measured on a
cost to cost basis. Hutton began work on a lump-sum contract at the
beginning of 2014. As bid, the statistics were as follows:
Lump-sum price (contract price) $4,000,000
Estimated costs
Labor $ 850,000
Materials and subcontractor 1,750,000
Indirect costs 400,000 3,000,000
$1,000,000
At the end of the first year, the following was the status of the contract:
Billings to date $2,230,000
Costs incurred to date
Labor $ 464,000
Materials and subcontractor 1,098,000
Indirect costs 193,000 1,755,000
Latest forecast total cost 3,000,000
It should be noted that included in the above costs incurred to date
were standard electrical and mechanical materials stored on the job
site, but not yet installed, costing $105,000. These costs should not be
considered in the costs incurred to date.
Instructions
(a) Compute the percentage of completion on the contract at the end of 2014.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2014.
(c) Make the journal entry to record the income (loss) for 2014 on Hutton’s books.