Question

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,050,000. During 2021, costs of $2,020,000 were incurred, with estimated costs of $4,020,000 yet to be incurred. Billings of $2,524,000 were sent, and cash collected was $2,270,000.

In 2022, costs incurred were $2,524,000 with remaining costs estimated to be $3,630,000. 2022 billings were $2,774,000, and $2,495,000 cash was collected. The project was completed in 2023 after additional costs of $3,820,000 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.

Answer 1

1) Under completed-contract method, all are same as in % of completion method except for recognizing gross profit over contract's total tenure. That is, gross profit (or gross loss, if any) is recognized each year based on % of completion of total contract under percentage-of-completion method whereas total gross profit (loss) is recognized at the last year of the contract under completed-contract method as does not qualify for revenue recognition over time. Therefore, 2021 $2,524,000 2022 $2,774,000 2023 $2,752,000 (2023 = $8050000 - $2524000 - $2774000 = $2752000] 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 $2,020,000 $2,020,000 $4,020,000 $6,040,000 2022 $2,524,000 $4,544,000 $3,630,000 $8,174,000 2023 $3,820,000 $8,364,000 [2022=$2020000+$2524000; 2023=$4544000+$3820000] $0 $8,364,000 Contract price of this project Less: Cumulative cost to date till 2023 This contract's estimated gross profit (loss) $8,050,000 [$2524000 + $2774000 + $2752000] $8,364,000 [As calculated above] $314,000 --> To be recognized when the contract is completed in 2023 2021 2022 $0 $0 That is, Revenue to recognize (based on completed contract) Less: Cumulative cost to date till 2023 Gross Profit (Loss) to be recognized 2023 $8,050,000 $8,364,000 $314,000 $0 $0

Account Titles Requirement-2(a) 2021 Debit Credit Requirement-2(b) 2022 Debit Credit $2,020,000 $2,524,000 Construction in process Various Accounts (Materials, Labor, Etc.) (To record construction costs) $2,020,000 $2,524,000 $2,524,000 $2,774,000 Accounts receivable Billings on construction contract (To record progress billings) $2,524,000 $2,774,000 $2,270,000 $2,495,000 Cash Accounts receivable (To record cash collections) $2,270,000 $2,495,000 No Entry No Entry Construction Expenses Construction in process Revenue from long-term contracts (To record gross profit (if debit) loss (if credit) No Entry No Entry Billings on construction contract Construction in process (To close these accounts)

Requirement-3(a) 2021 Requirement-3(b) 2022 Balance Sheet (Partial) Current Assets: $254,000 Accounts Receivable Construction in process $2,020,000 Less: Billings ($2,524,000) Costs and Profits in excess of Billings $4,544,000 ($5,298,000) $533,000 [2021 = $2524000 - $2270000; 2022=$254000 + ($2774000 - $2495000)] [2022 = $2020000 + $2524000 = $4544000] [2022 = $2524000 + $2774000 = $5298000] ($754,000) | ($504,000) Current Liabilities: Billings excess of Costs $504,000 $754,000 [2021 = $2524000 - $2020000; 2022 = $504000 + ($2774000 - $2524000]