Question

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,400,000. During 2021, costs of $2,160,000 were incurred, with estimated costs of $4,160,000 yet to be incurred. Billings of $2,692,000 were sent, and cash collected was $2,410,000.
In 2022, costs incurred were $2,692,000 with remaining costs estimated to be $3,840,000. 2022 billings were $2,942,000, and $2,635,000 cash was collected. The project was completed in 2023 after additional costs of $3,960,000 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

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Arrow Construction Company
Ans to 1	Calculation of Gross Profit
Particulars	2021	2022	2023	Note
Contract Price	8,400,000	8,400,000	8,400,000	A
Cost Incurred during the year	2,160,000	2,692,000	3,960,000	B
Estimated cost to complete	4,160,000	3,840,000	-	C
Cost Incurred to date	2,160,000	4,852,000	8,812,000	D
(Sum total of the cost incurred during the year)
Estimated total cost	6,320,000	8,692,000	8,812,000	E=C+D
Percentage complete	34.18%	55.82%	100.00%	F=D/E
(Cost Incurred to date/Estimated total cost)
Revenue to be recognized	2,870,886	1,818,115	3,710,999	G
(Contract Price*Percentage complete)- revenue previously recognized
Year 2021: 34.18% completed. Revenue recognized = 34.18% x $ 8,400,000 = $ 2,870,886.
Year 2022: 55.82% completed. Revenue recognized = 55.82% x $ 8400,000 – $ 2,870,886 (previously recognized) = $ 1,818,115.
Year 2023: 100% completed. Revenue recognized = 100% x $ 8,400,000 – $ 2,870,886- $ 1,818,115 (previously recognized) = $ 3,710,999.

		2021		2022
Ans to 2a and 2b	Journal Entries	Debit $	Credit $		Debit $	Credit $
Costs Incurred	CIP (Work-in-progress)	2,160,000			2,692,000
	Cash		2,160,000			2,692,000
Billing	Accounts Receivable	2,692,000			2,942,000
	Billing on CIP		2,692,000			2,942,000
Receiving Payments	Cash	2,410,000			2,635,000
	Accounts Receivable		2,410,000			2,635,000
Period end adjustments for Revenue	Construction Expense	2,160,000
(Gross Profit entry)	CIP (Work-in-progress)	710,886
	Construction Revenue		2,870,886
Period end adjustments for Revenue	Construction Expense				2,692,000
(Gross Profit entry)	CIP (Work-in-progress)					873,885
	Construction Revenue					1,818,115

Workings for Balance Sheet
CIP (Work-in-progress)
Account	Amount ($)
Cash	2,160,000
Construction Revenue	710,886
Balance at the end of 2021	2,870,886
Cash	2,692,000
Construction Revenue	(873,885)
Balance at the end of 2022	4,689,001
Accounts Receivable
Account	Amount ($)
Billing on CIP	2,692,000
Cash	(2,410,000)
Balance at the end of 2021	282,000
Billing on CIP	2,942,000
Cash	(2,635,000)
Balance at the end of 2022	589,000
Billing on CIP
Account	Amount ($)
Accounts Receivable	2,692,000
Balance at the end of 2021	2,692,000
Accounts Receivable	2,942,000
Balance at the end of 2022	5,634,000

Ans to 3a and 3b
Balance Sheet (Partial)	2021	2022
Current Assets:
CIP (Work-in-progress)	2,870,886	4,689,001
Accounts Receivable	282,000	589,000
	3,152,886	5,278,001
Current Liabilities:
Billing on CIP	2,692,000.00	5,634,000.00
	2,692,000.00	5,634,000.00