Problem:
Dobson 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. Dobson began work on a lump-sum contract at the beginning of 2011. 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
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$1.000.000
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At the end of the first year, the following was the status of the contract:
Billings to date
Costs incurred to date
Labor $ 464,000
Materials and subcontractor 1,098,000
Indirect costs 193.000
Latest forecast total cost
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$2,230,000
1,755,000
3,000,000
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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 2011.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2011.
(c) Make the journal entry to record the income (loss) for 2011 on Dobson's books.
(d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of Dobson Construction at the end of 2011 related to its construction accounts. Also indicate where these items would be classified on the balance sheet. Billings collected during the year amounted to $1,980,000.
(e) Assume the latest forecast on total costs at the end of 2011 was $4,050,000. How much income (loss) would Dobson report for the year 2011?