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31 October, 07:04

ABC expends $500,000 for work performed under a contract with a total contract price of $3 million and estimated costs of $2.5 million. It sends a bill to the customer for $400,000 under the terms of the contract.

a. How much revenue and gross profit should the company recognize in the income statement?

b. How is the $400,000 billing reported on the balance sheet?

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  1. 31 October, 10:51
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    a. $100,000

    b. The $400,000 will be reported as accounts receivable in the balance sheet under current assets.

    Explanation:

    Under the cost to completion method, the amount of revenue earned from long term projects is a function of the cost incurred on the project. In other words, the more the cost incurred, the higher the revenue.

    Given that the total contract price of $3 million and estimated costs of $2.5 million, when $500,000 is expended for work performed, actual revenue earned and to be recognized

    = $500,000/$2.5 million * $3 million

    = $600,000

    Gross income = Revenue - cost of sales

    = $600,000 - $500,000

    = $100,000

    If the company only bills $400,000 having earned $600,000

    Debit Accounts receivables $400,000

    Debit Unbilled receivables $200,000

    Credit Revenue account $600,000
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