Question

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,030,000. During 2021, costs of $2,010,000 were incurred with estimated costs of $4,010,000 yet to be incurred. Billings of $2,510,000 were sent, and cash collected was $2,260,000.

In 2022, costs incurred were $2,510,000 with remaining costs estimated to be $3,615,000. 2022 billings were $2,760,000 and $2,485,000 cash was collected. The project was completed in 2023 after additional costs of $3,810,000 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

Solution 1:

Computation of % of completion, revenue recognition and Gross Profit - Arrow Construction Company
Year	Actual cost incurred (A)	Total cost incurred till date (B)	Total estimated Cost ( C )	% of completion (D) (B/C)	Contract Price (E)	Total Revenue to be recoganized (F) (E * D)	Revenue for current period (G)	Gross Profit (H)
2021	$2,010,000	$2,010,000	$6,020,000	33.39%	$8,030,000	$2,681,113	$2,681,113	$671,113	$2,681,113 - $2,010,000
2022	$2,510,000	$4,520,000	$8,135,000	55.56%	$8,030,000	$4,461,659	$1,780,547	-$776,113	$8,030,000 - $8,135,000 - $671,113
2023	$3,810,000	$8,330,000	$8,330,000	100.00%	$8,030,000	$8,030,000	$3,568,341	-$195,000	$8,030,000 - $8,330,000 - $671,113 + $776,113

Solution 2a:

Journal Entries - Arrow Construction Company - 2021
Event	Particulars	Debit	Credit
1	Construction in Progress Dr	$2,010,000
	To Various Accounts		$2,010,000
	(To record construction cost incurred)
2	Accounts receivables Dr	$2,510,000
	To Billings on construction contract		$2,510,000
	(To record progress billings)
3	Cash Dr	$2,260,000
	To Accounts receivables		$2,260,000
	(To record collection from customer)
4	Construction in Progress Dr	$671,113
	Cost of construction Dr	$2,010,000
	To Revenue from long term contracts		$2,681,113
	(To record revenue and gross profit)

Solution 2b:

Journal Entries - Arrow Construction Company - 2022
Event	Particulars	Debit	Credit
1	Construction in Progress Dr	$2,510,000
	To Various Accounts		$2,510,000
	(To record construction cost incurred)
2	Accounts receivables Dr	$2,760,000
	To Billings on construction contract		$2,760,000
	(To record progress billings)
3	Cash Dr	$2,485,000
	To Accounts receivables		$2,485,000
	(To record collection from customer)
4	Cost of construction Dr	$2,556,659
	To Construction in Progress		$776,113
	To Revenue from long term contracts		$1,780,547
	(To record revenue and gross profit)

Solution 3a & 3b:

Arrow construction company
Balance Sheet (Partial)
As on December 31
Particulars	2021	2022
Assets:
Current Assets:
Accounts Receivables 2021 - $2,510,000 - $2,260,000 2022 - $250,000 + $2,760,000 - $2,485,000	$250,000	$525,000
Cost and Profit in excess of billing 2021 - $2,681,113 - $2,510,000	$171,113
Liabilities and stockholder's equity:
Current liabilities:
Billings in excess of costs and profits ($2,760,000 - $2,510,000 + $776,113 - $171,113)		$855,000