MSK Construction Company contracted to construct a factory building for $525,000. Construction started during 20X1 and was completed in 20X2. Information relating to the contract follows: 20X1 20X2
Costs incurred during the year $290,000 $150,000
Estimated additional cost to complete 145,000 —
Billings during the year 260,000 265,000
Cash collections during the year 240,000 285,000

Required:
a. Record the preceding transactions in MSK’s books assuming it recognizes revenue over time and uses costs incurred to measure the extent to which its performance obligation has been satisfied.
b. Record the preceding transactions in MSK’s books assuming it recognizes revenue at a point in time when control of the completed factory is transferred to the customer at the end of the project.

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

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