Question

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,500,000. During 2021, costs of $2,200,000 were incurred, with estimated costs of $4,200,000 yet to be incurred. Billings of $2,740,000 were sent, and cash collected was $2,450,000. In 2022, costs incurred were $2,740,000 with remaining costs estimated to be $3,900,000. 2022 billings were $2.990,000, and $2,675,000 cash was collected. The project was completed in 2023 after additional costs of $4,000,000 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 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. Complete this question by entering your answers in the tabs below. Req 1 Reg 2A Req 2B Reg 3A Reg 3B Calculate the amount of revenue and gross profit or loss to be recognized in each of the three years. (Loss amounts should be Indicated with a minus sign.) Year Revenue recognized Gross profit (loss) recognized 2021 2022 2023 Total

Answer 1

Solution:

1.

Particulars	31. Dec. 2021	31. Dec. 2022	31. Dec. 2023
Cumulative Revenue (WN -1)      Revenue for the C.Y (-) Cost incurred during the year Profit to be recognized	$2,921,875	$4,749,800	$8,500,000
	$2,921,875 $2,200,000	$1,827,925 $2,740,000	$3,750,200 $4,000,000
	$721,875	($912,075)	($249,800)

Workings:

1. % of Completion = Costs incurred to date / Total costs ×100

= $2,200,000 / $6,400,000 ×100 = 34.375%

= $4,940,000 / $8,840,000 ×100 = 55.88%

= $8,940,000 / $8,940,000 ×100 = 100%

2. Contract Revenue     = Contract Price × % of Completion

= $8,500,000 * 34.375% = $2,921,875

= $8,500,000* 55.88% = $4,749,800

= $8,500,000* 100% = $8,500,000

2a. Journal Entries for 2021

Year	General Journal	Debit $	Credit $
2021	Construction in Progress            To Cash	2,200,000	2,200,000
	Accounts Receivable            To Billing on Construction Contract	2,740,000	2,740,000
	Cash            To Accounts Receivable	2,450,000	2,450,000
	Construction in Progress (Profit) Construction Expense            To Construction Revenue	721,875 2,200,000	2,921,875

2b. Journal Entries for 2022

Year	General Journal	Debit $	Credit $
2022	Construction in Progress            To Cash	2,740,000	2,740,000
	Accounts Receivable            To Billing on Construction Contract	2,990,000	2,990,000
	Cash            To Accounts Receivable	2,675,000	2,675,000
	Construction Expense            To Construction Revenue            To Construction in Progress	2,740,000	1,827,925 912,075

3a.

Balance Sheet as at 2021
Current Assets: Account Receivables Cash (2,450,000 – 2,200,000) Construction in Progress (2,000,000 + 721,875)	290,000 250,000 2,721,875

3b.

Balance Sheet as at 2022
Current Assets: Account Receivables Construction in Progress (2,740,000 – 912,075) Current Liabilities: Bank Overdraft (2,740,000 – 2,675,000)	315,000 1,827,925 65,000