Answer:
MSK Construction Company
a. Journal Entries, under the assumption that MSK recognizes revenue over time and uses costs incurred to measure the extent to which its performance obligation has been satisfied:
20X1:
Debit Work in Process $290,000
Credit Cash Account $290,000
To record the cost incurred for the contract.
Debit Accounts Receivable $260,000
Debit Unbilled Cost of Contract $90,000
Credit Contract Revenue $350,000
To record the amount billed to customer and revenue.
Debit Cash Account $240,000
Credit Accounts Receivable $240,000
To record the cash receipts from customer.
20X2:
Debit Work in Process $150,000
Credit Cash Account $150,000
To record the cost incurred for the contract.
Debit Accounts Receivable $265,000
Credit Unbilled Cost of Contract $90,000
Credit Contract Revenue $175,000
To record the amount billed to customer and corresponding revenue.
Debit Cash Account $285,000
Credit Accounts Receivable $285,000
To record the cash receipts from customer.
b. Journal Entries, under the assumption that MSK recognizes revenue at a point in time when control of the completed factory is transferred to the customer at the end of the project:
20X1:
Debit Work in Process $290,000
Credit Cash Account $290,000
To record the cost incurred for the contract.
Debit Accounts Receivable $260,000
Credit Unearned Revenue $260,000
To record the amount billed to customer.
Debit Cash Account $240,000
Credit Accounts Receivable $240,000
To record the cash receipts from customer.
20X2:
Debit Work in Process $150,000
Credit Cash Account $150,000
To record the cost incurred for the contract.
Debit Accounts Receivable $265,000
Debit Unearned Revenue $260,000
Credit Contract Revenue $525,000
To record the amount billed to customer and revenue.
Debit Cash Account $285,000
Credit Accounts Receivable $285,000
To record the cash receipts from customer.
Explanation:
a) Data and Calculations:
Contract price = $525,000
20X1 20X2
Costs incurred during the year $290,000 $150,000
Estimated additional cost to complete $145,000 —
Estimated Total costs $435,000 $150,000
Billings during the year 260,000 265,000
Cash collections during the year 240,000 285,000
Revenue Recognition for 20X1:
= incurred cost/Total estimated costs * contract price
= $290,000/$435,000 * $525,000
= $350,000
Revenue Recognition for 20X2:
= $525,000 - $350,000
= $175,000
