Question

Exercise 6-21 (Algo) Long-term contract; revenue recognition over time; loss projected on entire project [LO6-9] On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,300,000. During 2021, costs of $2,100,000 were incurred with estimated costs of $4,100,000 yet to be incurred. Billings of $2,600,000 were sent, and cash collected was $2,350,000. In 2022, costs incurred were $2,600,000 with remaining costs estimated to be $3,750,000. 2022 billings were $2,850,000 and $2,575,000 cash was collected. The project was completed in 2023 after additional costs of $3,900,000 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. Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Req 3A Req 3B Compute the amount of revenue and gross profit or loss to be recognized in 2021, 2022, and 2023 using the percentage of completion method. (Do not round intermediate calculations. Loss amounts should be indicated with a minus sign. Round your final answers to the nearest whole dollar.) Percentages of completion Choose numerator | + Choose denominator = 1% complete to date 2,100,000 $ 6,200,000/= 33.8710% 2021 2022 2023 To date 2021 Recognized in prior years Recognized in 2021 Construction revenue Construction expense Gross profit (loss) $ To date 2022 Recognized in prior years Recognized in 2022 Construction revenue Construction expense Gross profit (loss) 2023 To date Recognized in 2023 years Construction revenue Construction expense Gross profit (loss) $ $ 0 < Req1 Req 2A >

Answer 1

1	Revenue to be recognized=Contract price*Percentage of completion
	Gross profit/(loss) to be recognized=Estimated gross profit/(Loss) *percentage of completion
	Estimated gross profit/(loss)=Contract price-Total estimated costs
				2021	2022	2023
	a) Contract price			8300000	8300000	8300000
	b) Actual cost to date			2100000	4700000	8600000
					(2100000+2600000)	(2100000+2600000+3900000)
	c) Estimated costs to complete			4100000	3750000	0
	d) Total estimated costs (b)+©			6200000	8450000	8600000
	e) Estimated gross profit/(loss) (a)-(d)			2100000	-150000	-300000
	f) Percentage of completion (b)/(d)			33.87%	55.62%	100.00%
	g) Revenue to be recognized (a)*(f)			2811290	1738710	3750000
					(Note:1)	(Note:2)
	h) Gross profit/(loss) to be recognized €*(f)			711290	-861290	-150000
					(Note:1)	(Note:2)
	Note:1
	Loss to be recognized completely irrespective of the percentage of completion
	Loss to be recognized in 2022=Estimated loss+Profit recognized in prior years=150000+711290=$ 861290
	Revenue to be recognized=Expenses for 2022-Loss recognized in 2022=2600000-861290=$ 1738710
	Note:2
	Loss to be recognized completely irrespective of the percentage of completion
	Loss to be recognized in 2023=300000-Loss recognized in prior years=300000-150000=$ 150000
	Revenue to be recognized=Expenses for 2023-Loss recognized in 2023=3900000-150000=$ 3750000
	Percentage of completion=Total cost incurred till date /Total estimated cost
	2021	2100000/(2100000+4100000)=2100000/6200000=33.87%
	2022	(2100000+4700000)/(2100000+4700000+3750000)=4700000/8450000=55.62%
	2023	(2100000+4700000+3900000)/(2100000+4700000+3900000)=8600000/8600000=100%
			2021
			To date	Recognized in prior years		Recognized in 2021
			a	b		a-b
	Construction revenue   c		8300000*33.87%=$ 2811290	0		2811290
	Construction expense d		2100000	0		2100000
	Gross profit (loss) (c-d)					711290
			2022
			To date	Recognized in prior years		Recognized in 2021
			a	b		a-b
	Construction revenue   c		(Note:1)			1738710
	Construction expense d		4700000	2100000		2600000
	Gross profit (loss) (c-d)		(Note:1)			-861290
			2023
			To date	Recognized in prior years		Recognized in 2021
			a	b		a-b
	Construction revenue   c		(Note:2)			3750000
	Construction expense d		8600000	4700000		3900000
	Gross profit (loss) (c-d)		(Note:2)			-150000
	Journal entries:
2-a.	Date	Account Titles and Explanation			Debit	Credit
	2021	Construction in progress			2100000
		Various accounts				2100000
		(Construction cost incurred)
		Accounts receivable			2600000
		Billings on construction contract				2600000
		(Billings during the year)
		Cash			2355000
		Accounts receivable				2355000
		(Cash collections during the year)
		Construction in progress			711290
		Cost of construction			2100000
		Revenue from long-term contracts				2811290
		(Gross profit and revenue recognized)
2-b.	Date	Account Titles and Explanation			Debit	Credit
	2022	Construction in progress			2600000
		Various accounts				2600000
		(Construction cost incurred)
		Accounts receivable			2850000
		Billings on construction contract				2850000
		(Billings during the year)
		Cash			2575000
		Accounts receivable				2575000
		(Cash collections during the year)
		Construction in progress				861290
		Cost of construction			2600000
		Revenue from long-term contracts				1738710
		(Gross loss and revenue recognized)