Question

a constructor signed an agreement to construct a dam that requires a four years to complete for a contract price of birr 100000000.the contractor collected 15% of the contract price in advance.the cost to be incurred yo complete the dam is estimated to birr 80000000.sk if the receipt of payment method of recognizing revenue is used what entry is passed by contractor at the time of contract

Answer 1

Assuming that the receipt of payment method is used to recognize revenue, the contractor would pass the following entry at the time of contract:

Debit: Cash/Bank Account (being the advance payment received) - Birr 15,000,000
Credit: Contract Liability Account (being the obligation to construct the dam) - Birr 85,000,000

This entry reflects the fact that the contractor has received an advance payment of Birr 15,000,000 and has an obligation to construct the dam for Birr 85,000,000. The contract liability account will be gradually reduced as the construction progresses and the costs are incurred. Once the costs incurred are equal to the contract price, the obligation will be fulfilled and the contract will be completed. At that time, the revenue will be recognized in full and the contract liability account will be closed.