Question

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2018, costs of $2,000,000 were incurred, with estimated costs of $4,000,000 yet to be incurred. Billings of $2,500,000 were sent, and cash collected was $2,250,000. In 2019, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2019 billings were $2,750,000, and $2,475,000 cash was collected. The project was completed in 2020 after additional costs of $3,800,000 were incurred. The company's fiscal year-end is December 31. This project does not qualify for revenue recognition over time. Required: 1. Calculate the amount of revenue and gross profit or loss to be recognized in each of the three years. 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

Answer 1
Gross profit recognize under completed contract method when Company completed contract.
Provision For Loss of Project, When Estimated Project cost is more than Contract Price then Difference between them Provision should be made. And for future Amount of provision should be used for write of loss.
	2018	2019	2020
Cost incurred during the year	$        2,000,000	$           2,500,000	$       3,800,000
Cumulative cost incurred at end of year	$        2,000,000	$           4,500,000	$       8,300,000
Cumulative cost incurred at end of year	$        2,000,000	$           4,500,000	$       8,300,000
Add: Estimated costs to complete as of year-end	$        4,000,000	$           3,600,000	$                        0
Total estimated cost	$        6,000,000	$           8,100,000	$       8,300,000
Less: Contract value	$        8,000,000	$           8,000,000	$       8,000,000
Loss (If any)		$              100,000	$           300,000
Less: Loss settled from Provision			$         (100,000)
Gross Loss	$                       -	$              100,000	$           200,000
Revenue Recognized = Cost incurred plus Gross Profit Less Gross Loss (if any)
Cost incurred during the year	$        2,000,000	$           2,500,000	$       3,800,000
Less: Gross Loss	$                       -	$              100,000	$           200,000
Revenue	$        2,000,000	$           2,400,000	$       3,600,000

Answer 2
Date	General Journal	Debit	Credit
2018	Construction in progress	$        2,000,000
	Various Accounts		$           2,000,000
	(To record cost incurred in Progress.)
2018	Accounts receivable	$        2,500,000
	Billings on construction contract		$           2,500,000
	(To record Billings to Customer.)
2018	Cash	$        2,250,000
	Accounts receivable		$           2,250,000
	(To record cash collected from customer.)
2018	Cost of construction	$        2,000,000
	Construction Revenue		$           2,000,000
	(To record recognize Revenue.)
2019	Construction in progress	$        2,500,000
	Various Accounts		$           2,500,000
	(To record cost incurred in Progress.)
2019	Accounts receivable	$        2,750,000
	Billings on construction contract		$           2,750,000
	(To record Billings to Customer.)
2019	Cash	$        2,475,000
	Accounts receivable		$           2,475,000
	(To record cash collected from customer.)
2019	Cost of construction	$        2,500,000
	Construction in progress		$              100,000
	Construction Revenue		$           2,400,000
	(To record recognize Revenue.)

Answer 3
Partial balance sheet
	2018		2019
Current assets
Accounts receivable		$            250,000		$           525,000
Current liability
Billings	$                                                                                                2,500,000		$           5,250,000
Less: Construction in progress	$                                                                                                2,000,000		$           4,400,000
Billings in excess of Cost		$            500,000		$           850,000

Year	2018	2019
Accounts receivable at beginning	$                       -	$              250,000
Add: Amount billed	$        2,500,000	$           2,750,000
Less: Cash received	$        2,250,000	$           2,475,000
Accounts receivable at Ending	$            250,000	$              525,000
Beginning Construction in progress	$                       -	$           2,000,000
Add: Cost incurred	$        2,000,000	$           2,500,000
Add: Gross profit (loss)	$                         0	$            (100,000)
Ending Construction in progress	$        2,000,000	$           4,400,000
Billing Amount	$        2,500,000	$           2,750,000
Cumulative Billing amount	$        2,500,000	$           5,250,000