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Estimate the total income of the project with the percentage of
completion method
Let us estimate the total income of the project by using percentage of completion method, if revenue estimated is $300000, estimated costs is $60000 and costs to date is $7000.
Solution
The solution is as follows −
Step 1 -
Percentage of completion = costs to date / estimated cost of project = 7000/60000 = 11.67 % (rounded to two digits)
Step 2 -
Total income (estimated) = revenue estimated – estimated costs = $300000 – 60000 = $240000
Step 3 -
Income recognition = percentage of completion * total income (estimated) = 11.67% * $240000 = $28008
Percentage of completion method accounting
Let’s say, the business has a project, which is long term and has incurred cost 350 to date
Hence, double bookkeeping entry for cost incurred will be as follows −
| Account | Debit | Credit |
|---|---|---|
| Construction in progress Accounts payable | 350 - | - 350 |
| total | 350 | 350 |
Estimate total cost of project = 1500, estimate total revenue = 3000
Step 1 -
Percentage of completion = costs to date / estimated cost of project = 350/1500 = 23.33 % (rounded to two digits)
Step 2 -
Revenue recognized = % of completion * total estimated revenue = 23.33% * 3000 = 700 (rounded)
Step 3 -
Income recognition = revenue recognized – expenses = 700 - 350 = 350
Now, income recognition is added in income statement by following journal −
| Account | Debit | Credit |
|---|---|---|
| Construction in progress Expenses Revenue | 350 350 - | - - 700 |
| total | 700 | 700 |
For the next accounting period
Cost incurred = 500
Step 1
Percentage of completion = 500 / estimated cost of project = 500/1500 ⇒ 33.33 % (rounded to two digits)
Step 2
Revenue recognized = % of completion * total estimated revenue = 33.33% * 3000 ⇒ 1000 (rounded)
Step 3
Income recognition = revenue recognized – expenses = 1000 - 500 ⇒ 500
Adjustments made = current period – previous period
Adjustments in costs = 500 – 350 ⇒ 150
Adjustments in revenue = 1000 – 700 ⇒ 300
Adjustments in income = 500 – 350 ⇒ 150
Journal for construction in progress
The journal entries for construction in progress are as follows −
Cost incurred
| Account | Debit | Credit |
|---|---|---|
| Construction in progress Accounts payable | 150 - | - 150 |
| total | 150 | 150 |
Income recognized
| Account | Debit | Credit |
|---|---|---|
| Construction in progress Expenses Revenue | 150 150 - | - - 300 |
| total | 300 | 300 |
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