Question

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,420,000. During 2018, costs of $2,140,000 were incurred with estimated costs of $4,140,000 yet to be incurred. Billings of $2,640,000 were sent, and cash collected was $2,390,000.

In 2019, costs incurred were $2,640,000 with remaining costs estimated to be $3,810,000. 2019 billings were $2,890,000 and $2,615,000 cash was collected. The project was completed in 2020 after additional costs of $3,940,000 were incurred. The company’s fiscal year-end is December 31. Arrow recognizes revenue over time according to the percentage of completion.

Required:
1. Compute the amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020 using the percentage of completion method?
2a. Prepare journal entries for 2018 to record the transactions described (credit "various accounts" for construction costs incurred).
2b. Prepare journal entries for 2019 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, 2018.
3b. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2019.

Answer 1

Requirement-1 2018 2019 2020 $2,640,000 $2,890,000 $2,890,000 [2020 $8,420,000 $2640000- $2890000] Billings during the year 2018 2019 2020 2,140,000 $2,640,000 $3,940,000 $2,140,000 $4,780,000 $8,720,000 [2019-$2140000+$2640000; 2020-$4780000+$3940000] Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete as of year-end $4,140,000 $3,810,000 $0 Estimated total costs 6,280,000 $8,590,000 $8,720,000 Therefore, % of completion [For 2018: $2,140,000 / $6,280,000-3407696; For 2019: $4,780,000 / $8,590,000 : 55.646%; For 2020: S8, 720,000 / $8,720,000-100%) 34.076% 100% 55.646% $8,420,000 [$2640000+$2890000+ $2890000] Contract price of this project Less: Cumulative cost to date till 2020 $8,720,000 [As calculated abovel This contract's estimated gross profit (loss) when negotiated 300,000> Spread over 3 years of contract as below 2018 2019 2020 $2,869,236 $4,685,402 $8,420,000 [S8420000 x 34.076%; $8420000 x 55.64696; $8420000 x 100%) Contract value completed Less: Revenue recognized already till last year 0 $2,869,236 -$4,685,402 [Ref: Above linel Revenue to recognize (based on % of completion) Less: Cost incurred during the year Gross Profit(Loss) to be recognized $2,869,236 $1,816,166 $3,734,598 $2,140,000 S2,640,000 3,940,000 [Given] $729,236$823,834 $205,402

Requirement-2: Requirement-2fa Requirement-2(c Requirement-2(b) Account Titles 2018 2019 2020 Debit Debit Credit Credit Debit Credit $3,940,000 [cost incurred during the yearl Construction in progress Various Accounts (Materials, Labor, Etc.) $2,140,000 $2,640,000 2,140,000 $2,640,000 $3,940,000 To record construction costs Accounts receivable $2,890,000 Billings during the year] $2,640,000 $2,890,000 $2,640,000 $2,890,000 $2,890,000 Billings on construction contract To record progress billings [Given] $2,390,000 $2,615,000 $4,390,000 Cash $2,390,000 $2,615,000 Accounts receivable $4,390,000 To record cash collections Cost of construction 2,140,000 $729,236 $2,640,000 $3,940,000 [Cost incurred during the year] $823,834 $205,402 [Gross Profit (loss) for the year as per workings] $3,734,598 [Balancing figure] Construction in progress $2,869,236 $1,816,166 Revenue from long-term contracts o record gross or losS Billings on construction contract Construction in progress To close these accounts No Entry No Entry $8,420,000 $8,420,000 [Total Contract Price]

Requirement-3 Requirement-3(a) Requirement-3(b) Balance Sheet (Partial) 2018 2019 Current Assets $525,000 [2018 $2640000-$2390000; 2019-$250000 ($2890000 - $2615000)] Accounts Receivable $250,000 $4,685,402 [2019 $2869236 $1816166] [2019 $2640000 $2890000] Construction in progress Less: Billings Costs and profit in excess of billings $2,869,236 ($2,640,000) ($5,530,000) $229,236 ($844,598) Current Liabilities $500,000 250,000 [2018 $2640000 $2140000; 2019 $2890000- $2640000] Billings in excess o costs