Question

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,240,000. During 2021, costs of $2,080,000 were incurred with estimated costs of $4,080,000 yet to be incurred. Billings of $2,580,000 were sent, and cash collected was $2,330,000. In 2022, costs incurred were $2,580,000 with remaining costs estimated to be $3,720,000. 2022 billings were $2,830,000 and $2,555,000 cash was collected. The project was completed in 2023 after additional costs of $3,880,000 were incurred. The company’s fiscal year-end is December 31. Arrow recognizes revenue over time according to percentage of completion. Required: 1. Compute the amount of revenue and gross profit or loss to be recognized in 2021, 2022, and 2023 using the percentage of completion method. 2a. Prepare journal entries for 2021 to record the transactions described (credit "various accounts" for construction costs incurred). 2b. Prepare journal entries for 2022 to record the transactions described (credit "various accounts" for construction costs incurred). 3a. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2021. 3b. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2022.

Answer 1

ANSWER:

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Part 1
	2021	2022	2023
Contract price	$                                                    8,240,000	$                                                                                 8,240,000	$                                                                                 8,240,000
Actual costs to date	$                                                    2,080,000	$                                                                                 4,660,000	$                                                                                 8,540,000
Estimated costs to complete	$                                                    4,080,000	$                                                                                 3,720,000	$                                                                                                -
Total estimated costs	$                                                    6,160,000	$                                                                                 8,380,000	$                                                                                 8,540,000
Estimated gross profit
(actual in 2020)	$                                                    2,080,000	$                                                                                   -140,000	$                                                                                   -300,000
Revenue Recognition:	33.77%	55.61%
2021	$2,080,000/$6,160,000	= 33.77% x $8,240,000	$                                                                                 2,782,338
2022	$4,660,000/$8,380,000	= 55.61% x $8,240,000 = $4,582,148 – 2,782,338	$                                                                                 1,799,810
2023	$8,240,000-$2,782,338-$1,799,810		$                                                                                 3,657,852
Gross profit (loss) recognized:
2021	$2,782,338-$2,080,000		$                                                                                     702,338
2022	($140,000)-$702,338		$                                                                                  (842,338)
2023	($300,000)-($140,000)		$                                                                                   -160,000
Part 2a and 2b
		Year 2021	Year 2022
Construction in Progress		$                                                                                 2,080,000	$                                                                                 2,580,000
Various Accounts		$                                                                                 2,080,000	$                                                                                 2,580,000
Accounts Receivable		$                                                                                 2,580,000	$                                                                                 2,830,000
Billing on Construction Contracts		$                                                                                 2,580,000	$                                                                                 2,830,000
Cash		$                                                                                 2,330,000	$                                                                                 2,555,000
Accounts Receivable		$                                                                                 2,330,000	$                                                                                 2,555,000
Cost of Construction		$ 702,338
Construction in progress		$                                                                                 2,080,000
Revenue from long term contracts		$                                                                                 2,782,338
Cost of Construction			$                                                                                 2,642,148
Revenue from long term contracts			$                                                                                 1,799,810
Construction in progress			$                                                                                     842,338
Requirement 3a and 3b
		Year 2021	Year 2022
Current Assets:
Accounts Receivable		$                                                                                    250,000	$                                                                                     525,000
Costs and Profit $2,782,338 in excess of billing $2,580,000		$                                                                                    202,338
Current Liabilities:
Billings $5,410,000 in excess of costs less loss			$                                                                                     890,000
($4,660,000-$140,000)=$4,520,000

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