Question

KoralGables Construction Co. began operations in 2015. Construction activity for 2015 is shown below. KoralGables recognizes revenue upon completion of the contract. Which of the following should be shown on the balance sheet at December 31, 2015?

Contract Price: 3,600,000
Billings in 2015: 1,200,000
Collections in 2015: 1,000,000
Cost in 2015: 800,000
Estimated Remaining Costs to Complete: 2,280,000

a. The contract liability, billings in excess of cost, of $200,000.
b. The contract liability, billings in excess of cost, of $400,000.
c. The contract asset, contract amount in excess of billings, of $200,000.
d. The contract asset, contract amount in excess of billings, of $400,000.

Answer 1

KoralGables Construction Co. has billed more than the costs it has incurred. The balance sheet should show a contract liability, billings in excess of cost, of $400,000 at December 31, 2015.

Step-by-step explanation:

The question relates to the accounting for construction contracts and requires an understanding of how to recognize revenue and report assets and liabilities on the balance sheet for a construction company. Since KoralGables Construction Co.

recognizes revenue upon completion of the contract, at December 31, 2015, we need to compare the billings to the costs incurred.

The billings on the contract to date are $1,200,000, and the costs incurred are $800,000, which gives us billings in excess of costs of $400,000. This creates a contract liability that should be reported on the balance sheet. Therefore, the correct answer is that the balance sheet should show the contract liability, billings in excess of cost, of $400,000.

To determine the amount that should be shown on the balance sheet at December 31, 2015, for KoralGables Construction Co., we need to calculate the contract liability or contract asset. The contract liability represents billings in excess of cost, whereas the contract asset represents the contract amount in excess of billings.

In this case, the contract price is $3,600,000, the billings in 2015 are $1,200,000, the collections in 2015 are $1,000,000, the cost in 2015 is $800,000, and the estimated remaining costs to complete are $2,280,000.

Since the billings in 2015 ($1,200,000) exceed the cost in 2015 ($800,000), the contract liability, billings in excess of cost, is $400,000. Therefore, the correct answer is (b) The contract liability, billings in excess of cost, of $400,000.