Noah Construction Company is building a large complex for a contract price of $5,000,000. This is a three-year project estimated to cost $4,000,000 and the following information is available:
$\begin{array}{llll}(\$ \text { in thousands) } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 }\
\text { Costs incurred } & \$ 1,000 & \$ 1,500 & \$ 1,250 \
\text { Estimated completion costs } & \$ 3,000 & \$ 1,500 & \$ 10 \
\text { Billings } & \$ 750 & \$ 1,750 & \$ 2,500 \
\text { Cash collected } & \$ 500 & \$ 1,500 & \$ 3,000
\end{array}$
-Which one of the following entries would be made in Year 3 to record the completion and acceptance of the project using the completed-contract method of revenue recognition?
A) DR Inventory: Construction in progress$\quad$$5,000,000$
CR Billings on construction in progress$\quad$$5,000,000$
B) DR Billings on construction in progress $\quad 5,000,000$
CR Inventory: Construction in progress$\quad$$3,750,000$
CR Income on long-term construction contract$\quad$$1,250,000$
C) DR Inventory: Construction in progress $\quad 3,750,000$
DR Income on long-term construction contract $\quad 1,250,000$
CR Billings on construction in progress$\quad$$5,000,000$
D) DR Billings on construction in progress$\quad$$\quad$$1,250,000$
CR Inventory: Construction in progress$\quad$$\quad$$1,250,000$

Question

Quizplus · Accepted Answer

Under the completed-contract method, revenue and profit are recognized only when the contract is completed. At the end of Year 3, the project is completed. The total costs incurred are $3,750,000 (sum of costs incurred over the three years: $1,000,000 + $1,500,000 + $1,250,000). The contract price is $5,000,000. Therefore, the profit is $1,250,000 ($5,000,000 contract price - $3,750,000 total costs). The entry debits (increases) Billings on construction in progress for the total contract price, credits (decreases) Inventory: Construction in progress for the total costs incurred, and credits (recognizes) Income on long-term construction contract for the profit realized upon completion.

Noah Construction Company Is Building a Large Complex for a Contract