Question

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,450,000. The project began in 2021 and was completed in 2022. Data relating to the contract are summarized below:

	2021			2022
Costs incurred during the year	$	336,000		$	1,870,000
Estimated costs to complete as of 12/31		1,344,000			0
Billings during the year		446,000			1,710,000
Cash collections during the year		361,000			1,795,000

Required:
1. Compute the amount of revenue and gross profit or loss to be recognized in 2021 and 2022 assuming Nortel recognizes revenue over time according to percentage of completion.
2. Compute the amount of revenue and gross profit or loss to be recognized in 2021 and 2022 assuming this project does not qualify for revenue recognition over time.
3. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2021 assuming Nortel recognizes revenue over time according to percentage of completion.
4. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2021 assuming this project does not qualify for revenue recognition over time.

Answer 1

Answers:

1). The revenue and gross profit or loss to be recognized by Nortel under percentage of completion

Revenue to be recognized in 2021

Determine the percentage of work completed and multiply with the contract price

Percentage of work completed= Cost of work incurred to date/ Estimated total costs of work

Percentage of work completed=$336,000/$1,344,000

Revenue recognized= $336,000/$1,344,000 x $2,450,000=$612,500

Profit/loss= Revenue recognized - costs incurred in the period

Profit/loss=$612,500-$336,000=$276,500, profit

Revenue to be recognized in 2022

Revenue recognized=$2,450,000-$612,500=$1,837,500

Profit/loss= Revenue recognized - costs incurred in the period

Profit/loss=$1,837,500-$1,870,000=-$32,500, loss

2). The revenue and gross profit or loss to be recognized by Nortel where the project does not qualify for revenue recognition over time.

Under this method all of the revenue and profit associated with this project will be recognized only after the project is completed in 2022.This method is called completed contract method.

Revenue and profit or loss to be recognized in 2021= 0

Revenue to be recognized in 2022 (Contract price)= $2,450,000

Costs to the completion of the project=$336,000 + $1,870,000= $2,206,000

Contract price (Revenue) -------------------------$2,450,000

Total contract costs ($336,000 + $1,870,000) ($2,206,000)

Profit--------------------------------------------------$244,000

3). A partial balance sheet for Nortel end of 2021-Percentage of completion

Current Assets

Cash---------------------------$361,000

Construction in progress---$336,000

Accounts Receivable-------$85,000

Liabilities

Accounts Payable------------$336,000

.

4). Partial balance sheet as at end of 2021-Completed contact

Current Assets

Cash---------------------------$361,000

Construction in progress---$336,000

Accounts Receivable-------$85,000

Liabilities

Accounts Payable------------$336,000

.

Journal entries

Recording of costs incurred

Debit, Construction in progress---$336,000

Credit, Accounts Payable-------------------------$336,000

Recording of billings

Debit, Accounts Receivable-------$446,000

Credit, Billings---------------------------------------$446,000

Recording cash collections

Debit, Cash--------------------------$361,000

Credit, Accounts Receivable---------------------$361,000 (reduces accounts receivable balance)