Question

Exercise 6-21 (Algo) Long-term contract; revenue recognition over time; loss projected on entire project [LO6-9]

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,390,000. During 2021, costs of $2,130,000 were incurred with estimated costs of $4,130,000 yet to be incurred. Billings of $2,630,000 were sent, and cash collected was $2,380,000.

In 2022, costs incurred were $2,630,000 with remaining costs estimated to be $3,795,000. 2022 billings were $2,880,000 and $2,605,000 cash was collected. The project was completed in 2023 after additional costs of $3,930,000 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

2021 $2,630,000 2023 $2,880,000 (2023 = $8390000 - $2630000 - $2880000 = $2880000] Billings during the year Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete as of year-end Estimated total costs 2021 $2,130,000 $2,130,000 $4,130,000 $6,260,000 2022 $2,880,000 2022 $2,630,000 $4,760,000 $3,795,000 $8,555,000 2023 $3,930,000 $8,690,000 [2022=$2130000+$2630000; 2023=$4760000+$3930000] $0 $8,690,000 Therefore, % of completion 34.03% 55.64% 100.00% [For 2021: $2130000 / $6260000 = 34.03%; For 2022: $4760000 / $8555000 = 55.64%; For 2023: $8690000 / $8690000 = 100%] Contract price of this project Less: Cumulative cost to date till 2020 This contract's estimated gross profit (loss) $8,390,000 ($2630000 + $2880000 + $2880000] -$8,690,000 [As calculated above] -$300,000 --> Spread over 3 years of contract as below Contract value completed Less: Revenue recognized already till last year Revenue to be recognized Less: Cost incurred during the year Gross Profit (Loss) to be recognized 2021 $2,854,744 $0 $2,854,744 -$2,130,000 $724,744 2022 $4,668,194 -$2,854,744 $1,813,450 $2,630,000 $816,550 2023 $8,390,000 ($8390000 x 34.03%; $8390000 x 55.64%; $8390000 x 100%] $4,668,194 [Ref: Above line] $3,721,806 (based on % of completion) $3,930,000 (Given] $208,194

2) Account Titles Requirement-2(a) 2021 Debit Credit Requirement-2(b) 2022 Debit Credit Requirement-2(c) 2023 Debit Credit $2,130,000 $2,630,000 $3,930,000 [Cost incurred during the year] Construction in process Various Accounts (Materials, Labor, Etc.) (To record construction costs) $2,130,000 $2,630,000 $3,930,000 $2,630,000 $2,880,000 $2,880,000 [Billings during the year] Accounts receivable Billings on construction contract (To record progress billings) $2,630,000 $2,880,000 $2,880,000 $2,380,000 $2,605,000 [Given] Cash Accounts receivable (To record cash collections) $2,380,000 $2,605,000 $2,630,000 $3,930,000 $2,130,000 $724,744 Construction Expenses Construction in process Revenue from long-term contracts (To record gross profit) $816,550 $1,813,450 (Cost incurred during the year] $208,194 [Gross Profit (Dr) or Loss (Cr) as in Part-1] $3,721,806 [Balancing figure] $2,854,744 No Entry No Entry $8,390,000 Billings on construction contract Construction in process (To close these accounts) $8,390,000 [Total Contract Price]

Part-3(a) 2021 Part-3(b) 2022 Balance Sheet (Partial) Current Assets: Accounts Receivable Construction in process Less: Billings Costs and profit in excess of billings $250,000 $2,854,744 ($2,630,000) $4,668,194 ($5,510,000) $525,000 (2021 = $2630000 - $2380000; 2022=$250000 + ($2880000 - $2605000)] [2022 = $2854744 + $1813450] [2022 = $2630000 + $2880000] ($841,806) $224,744 Current Liabilities: Billings in excess of costs $500,000 $750,000 [2021 = $2630000 - $2130000; 2022 = $500000 + ($2880000 - $2630000]