BE.18.2, Shock Wave Inc began work on $ 7,000,000 contract in 2005 to construct an office building. During 2005, Shock Wave Inc, incurred costs of $ 1,715,000, billed their customers for $ 1,200,000 and collected $ 960,000. At December 31, 2005, the

1
Exercise 1, 2

• BE.18.2, Shock Wave Inc began work on 7,000,000
  contract in 2005 to construct an office building.
  During 2005, Shock Wave Inc, incurred costs of
  1,715,000, billed their customers for 1,200,000
  and collected 960,000. At December 31, 2005,
  the estimated future costs to complete the
  project total 3,185,000. Prepare Shock Waves
  2005 journal entries using the percentage of
  completion method.
• BE.18.4, Use the information above, but assume
  Shock Wave uses the completed contract method.
  Prepare the companys 2005 journal entries.

2
Answer of Exercise 1

• Construction in Process 1,715,000
• Materials, Cash, Payables, etc. 1,715,000
• Accounts Receivable 1,200,000
• Billings on Construction in Process 1,200,000
• Cash 960,000
• Accounts Receivable 960,000
• Construction in Process
  735,000
• Construction Expenses 1,715,000
• Revenue from Long-term Contract 2,450,000
• ( 1,715,000 4,900,000) x 2,100,000
  735,000

3
Answer of Exercise 2

• Construction in Process 1,715,000
• Materials, Cash, Payables, etc. 1,715,000
• Accounts Receivable 1,200,000
• Billings on Construction in Process 1,200,000
• Cash 960,000
• Accounts Receivable 960,000

4
Exercise 3

• BE.18.10, Yogi Bear Co sold equipment to Magilla
  Co for 20,000. The equipment is on Yogis books
  at a net amount of 14,000. Yogi collected
  10,000 in 2004, 5,000 in 2005 and 5,000 in
  2006. If Yogi uses the cost recovery method, what
  amount of gross profit will be recognized in each
  year ?.

5
Answer of Exercise 3

• 2004 0
• 2005 1,000 ( 15,000 14,000)
• 2006 5,000

6
Exercise 4

• E.18.6, On April 1, 2004, Brad Bridgewater Inc
  entered into a cost plus fixed free contract to
  construct an electric generator for Tom Dolan Co.
  At the contract date, Bridgewater estimated that
  it would take 2 years to complete the project at
  a cost of 2,000,000. The fixed free stipulated
  in the contract is 450,000. Bridgewater
  appropriately accounts for this contract under
  the percentage of completion method. During 2004,
  Bridgewater incurred costs of 700,000 related
  to the project. The estimated cost at December
  31, 2004, to complete the contract is
  1,300,000. Dolan was billed 600,000 under the
  contract.
• Instructions
• Prepare a schedule to compute the amount of gross
  profit to be recognized by Bridgewater under the
  contract for the year ended December 31, 2004.
  Show the supporting computations in good form.

7
Answer of Exercise 4

• Computation of Gross Profit to Be
• Recognized on Uncompleted Contract
• Year Ended December 31, 2004
• Total contract price
• Estimated contract cost at completion
  2,000,000
• ( 700,000 1,300,000)
• Fixed fee
  450,000
• Total
  2,450,000
•  
• Total estimated cost
  2,000,000
• Gross profit
  450,000
• Percentage of completion ( 700,000
  2,000,000) 35
• Gross profit to be recognized ( 450,000 x 35
  ) 157,500
•