Estimate the total income of the project with the percentage of completion method

Banking & FinanceFinance ManagementGrowth & Empowerment

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


raja
Published on 07-Jul-2021 14:36:33
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