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ACCTG311 (4)
Chapter 4

# Chapter 4 Long Term Contract Practice Question.docx

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School
University of Alberta
Department
Accounting
Course
ACCTG311
Professor
Kristie Dewald
Semester
Fall

Description
Accounting 311 Long-term contracts – practice problem (the solution is provided at the end of the question) On September 23, 2007 Software Development Inc. signed a contract to develop a business reporting system for a large conglomerate of companies. The contract price is \$2,000,000 with a payment schedule as follows: \$200,000 at contract signing \$700,000 on January 1, 2008 \$500,000 on July 1, 2008 \$400,000 on January 1, 2009 Remainder (\$200,000) at project completion The project was finalized on April 20, 2009. Costs incurred were as follows: \$160,000 2007 \$400,000 First 6 months of 2008 \$600,000 Second 6 months of 2008 \$440,000 2009 \$1,600,000 total costs 1. Calculate the revenue, expense and profit that Software Development Inc. would report on its income statement relating to this contract for the year 2007, for the 6 months ending June 30, 2008, for the 6 months ending December 31, 2008 and for the year 2009, assuming it uses the percentage of completion method. 2. Repeat the above assuming they use the completed contract method instead. Solution: 1. Percentage of completion method: % completed in each accounting period: Accounting period Costs incurred % complete 2007 160,000 / 10% 1,600,000 st 1 half, 2008 400,000 / 25% 1,600,000 2 half, 2008 600,000 / 37.5% 1,600,000 2009 440,000 / 27.5% 1,600,000 100% 2007 June 30, Dec 31, 2008 2009 Total 2008
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