What is construction in progress (CIP)?

2. Example of accounting for construction in progress

Let's look at an example of accounting for construction in progress.

1) On March 1, 20X9 a Company's Controller approved a project to add a new piece of equipment to the production facility. No entries are required at this point.

2) On March 14, 20X9 Vendor A delivered a major portion of the equipment to the Company and issued an invoice for $100,000:

Account Titles

Debit

Credit

Construction in Progress

100,000

 

      Accounts Payable

 

100,000

3) On March 15, 20X9 the Company received a bill from a transportation company for the delivery of the equipment. The transportation cost is to be included into the CIP account for the equipment because it relates to making the asset ready for use. The bill amount $3,000:

Account Titles

Debit

Credit

Construction in Progress

3,000

 

      Accounts Payable

 

3,000

4) On March 25, 20X9 the Company used some of its inventory in preparing the asset for use. The cost of such inventory was $1,500:

Account Titles

Debit

Credit

Construction in Progress

1,500

 

      Inventory

 

1,500

5) On March 31, 20X9 the Company's Engineering Department advised Finance Department that equipment was not ready for use. No entries are required at this point.

6) On April 2, 20X9 Vendor B delivered additional parts for the equipment and issued an invoice amounting $25,000:

Account Titles

Debit

Credit

Construction in Progress

25,000

 

      Accounts Payable

 

25,000

7) On April 16, 20X9 the Company's Engineering Department performed final testing of the equipment and put it in use. Engineering also advised Finance Department that the equipment was put in use. At this point, Finance Department posted a journal entry to move the accumulated asset cost to a property, plant and equipment account called Equipment. The cost was determined as follows:

Vendor A Invoice

$ 100,000

Transportation Invoice

3,000

Inventory Used

1,500

Vendor B Invoice

25,000

Total

$ 129,500

The journal entry to transfer the cost of this asset to the fixed assets is as follows:

Account Titles

Debit

Credit

Equipment

129,500

 

      Construction in Progress

 

129,500

In April 20X9 the Company would also start depreciating this piece of equipment.

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