Question

Exercise 6-22 (Algo) Long-term contract; revenue recognition upon project completion; loss projected on entire project [LO6-8, 6-9]

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,125,000. During 2021, costs of $2,050,000 were incurred, with estimated costs of $4,050,000 yet to be incurred. Billings of $2,560,000 were sent, and cash collected was $2,300,000.

In 2022, costs incurred were $2,560,000 with remaining costs estimated to be $3,675,000. 2022 billings were $2,810,000, and $2,525,000 cash was collected. The project was completed in 2023 after additional costs of $3,850,000 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

Part 1

Year	Revenue recognized	Gross profit (loss) recognized
2021	0	0
2022	0	(160000)
2023	8125000	(175000)
Total	8125000	$(335000)

Total loss = Total cost – total revenue = (2050000+2560000+3850000)-8125000 = 335000

Loss 2023 = additional costs 2023 - remaining costs estimated 2022 = 3850000-3675000 = 175000

Loss 2022 = total loss – loss 2023 = 335000-175000 = 160000

Part 2-a

No	Year	General journal	Debit	Credit
1	2021	Construction in progress	2050000
		Various accounts		2050000
2	2021	Accounts receivable	2560000
		Billings		2560000
3	2021	Cash	2300000
		Accounts receivable		2300000
4	2021	No journal entry required

Part 2-b

No	Year	General journal	Debit	Credit
1	2022	Construction in progress	2560000
		Various accounts		2560000
2	2022	Accounts receivable	2810000
		Billings		2810000
3	2022	Cash	2525000
		Accounts receivable		2525000
4	2022	Loss on long-term contract	160000
		Construction in progress		160000

Part 3-a

Balance Sheet (Partial) At December 31, 2021
Current assets:
Accounts receivable	260000
Current liabilities:
Billings in excess of costs	510000

Part 3-b

Balance Sheet (Partial) At December 31, 2022
Current assets:
Accounts receivable	545000
Current liabilities:
Billings in excess of costs less loss (2560000+2810000)-(2050000+2560000-(160000))	920000