CPA PEP Prep Forum (Unofficial)

Contract value  = $2,800,000

Cost to Complete Contract = $2,140,000 (1.4M+0.74M)

Contact Completed Rate = 35%

Method used is Percentage of Completion 

So, Company can recognize the revenue of $980,000  (related cost is 740,000)  [ 2.8M X35%)

Billed to Customer to date  = $700,000   (Assuming this amount is already booked in revenue the cost incurred is already accounted for 740K)

Additional revenue can be booked using below entry:

Accounts Receivable  Dr     $280,000

Revenue                              CR     $280,000

Entry already booked (Assumed)

Accounts Receivable   DR  700,000

Revenue                                   CR  700,000

COGS                          DR 740,000

Construction Inventory               CR 740,000

$2,800,000 * 35% = $980,000

Cr Contract Revenue                  $980,000
Dr AR                           $980,000

To record revenue earned to date. $700,000 was billed but not yet received, so it will be credited to AR with a corresponding debit to cash when received. 

I believe that's the answer, depending on whether the $700,000 billed to the customer was actually entered as a revenue/receivable yet. If it has, then the answer would change to the same AJE, except as $280,000 ($980,000 - 700,000). The wording is a little bit confusing. 

The question is also not clear about whether the costs incurred have been recorded or not, but I assume they have been since they've been "incurred" and would have to have been adjusted through cash/inventory/salaries wages etc, so I wouldn't make any adjustment. I think it's simply to assure you that the contract is still profitable and that no losses are needed to be realized. ($740K + $1.4 million = $2.14 million, which is less than the contract amount). And $740K / $2.14 million = roughly 35%. 

Does that makes sense? 

JE's

Dr: Construction in Progress(Asset)      740,000

   Cr: Cash (Expense)                                        740,000

Dr:Construction Expenses                     740,000

Dr:Construction in Progress                   231,000

    Cr:Construction in Revenue                           971,000

Note:Due to  35% being the maximum amount recognisable in the first year,(.35*660,000=2,800,000-2,140,000)it is not necessary to bill the full amount.Construction Revenue is a balancing amount.

My view.

My view.

IFRS 15

Revenue will be recognized when performance obligations has been satisfied. Revenue will be recognized over-time or at a point in time.

In this case, revenue will be recognized over time 

DR    AR. 980,000.   (35% * 2.8 million)

CR.   Revenue.      980,000

For the cost

DR.    Cost of sale.   740,000

CR.     Inventory.      740,000

Note: No JE for the invoice until when it's receive.

When the amount invoiced is received, which is 700,000 in this case

DR cash.  700,000

CR  AR.     700,00

I hope that helps