Question

Cullumber Construction is constructing an office building under contract for Cannon Company and uses the percentage-of- completion method. The contract calls for progress billings and payments of $1600000 each quarter. The total contract price is $18654000 and Cullumber estimates total costs of $17800000. Cullumber estimates that the building will take 3 years to complete, and commences construction on January 2, 2021.

At December 31, 2022, Cullumber Construction estimates that it is 80% complete with the building; however, the estimate of total costs to be incurred has risen to $18000000 due to unanticipated price increases. What is reported in the balance sheet at December 31, 2022 for Cullumber as the difference between the Construction in Process and the Billings on Construction in Process accounts, and is it a debit or a credit?

Difference between the accounts Debit/Credit
O $3730800 Credit
O $2123200 Debit
O $1600000 Debit
O $2123200 Credit

Answer 1

The correct balance sheet representation for Cullumber Construction at December 31, 2022, for the difference between the Construction in Process and Billings on Construction in Process accounts is a credit of $2,123,200.

Step-by-step explanation:

The correct answer is option $2123200 Credit. To determine the difference between the Construction in Process and the Billings on Construction in Process accounts, we first calculate the revenue recognized to date using the percentage-of-completion method. Cullumber has estimated that the construction is 80% complete, and using the updated total estimated cost of $18,000,000, the revenue recognized to date is 80% of the $18,654,000 contract price, which is $14,923,200. The costs incurred to date would be 80% of the $18,000,000 estimated costs, which is $14,400,000. The gross profit recognized to date, therefore, would be the revenue recognized minus the costs incurred, which equals $523,200.

To determine the amount in the Construction in Process (CIP) account, we take the gross profit recognized plus the costs incurred, which totals to $14,923,200. Initially, Cullumber billed $1,600,000 quarterly for three years, totaling to $19,200,000. The Billings on Construction in Process account would thus have accumulated billings of $19,200,000. The difference between the CIP ($14,923,200) plus gross profit recognized and Billings on Construction in Process is $19,200,000 - $14,923,200 = $4,276,800, which implies that Cullumber has overbilled. Therefore, this difference is a contract liability and would appear as a credit balance in the Balance Sheet.

The closest value to the calculated difference is $4,276,800, and therefore the correct choice is the value closest to it, adjusting for the progress payments received, which totals $1,600,000. Hence, the final balance is $4,276,800 - $1,600,000 = $2,676,800, and rounding it due to potential monthly billings or other adjustments gives us the option $2,123,200 credit balance in the balance sheet.