Question

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.

Answer 1

1. Computation of amount of revenue and gross profit using percentage of completion method.

Particulars	2021	2022	2023
Contract price	8,300,000	8,300,000	8,300,000
Cost incurred during the year	2,100,000	2,600,000	3,900,000
Estimated cost to complete (A)	4,100,000	3,750,000	-
Cost incurred up-to date (Sum of total costs incurred during the year) B	2,100,000	4,700,000	8,600,000
Estimated total cost (A+B)	6,200,000	8,450,000	8,600,000
% of completion (Cost incurred up-to date /total cost )	33.87%	55.62%	100%
Revenue to be recognized	(33.87%*8,300,000) =2,811,210	(55.62%*8,300,000-2,811,210) =1,805,250	(100%*8,300,000-2,811,210-1,805,250) =3,683,540
Gross profit /(loss) = Revenue to be recognized -cost incurred during the year	711,210	(794,750)	(216,460)
Bills during the year	2,600,000	2,850,000
Collections during the year	2,350,000	2,575,000

2(a)&(b) 2021. 2022  

	Journal entries	Debit	Credit	Debit	Credit
Costs incurred	CIP To Cash	2100,000	2100,000	2600,000	2,600,000
Billing	AR To billing on CIP	2600,000	2600,000	2850,000	2,850,000
Receiving payment	cash To AR	2,350,000	2,350,000	2,575,000	2,575,000
Period end adjustment for revenue (GP)	Construction expense CIP(WIP) To Construction Revenue	2100,000 711,210	2,811,210
Period end adjustment for revenue (GL)	construction expense To CIP(WIP) Construction revenue			2,600,000	794,750 1,805,250

3.(a) &(b) partial balancesheet

Particulars	2021	2022
CA
CIP(WIP)	2100,000+711,210=2,811,210	2,811,210+2,600,000-794,750=4,616,460
Accounts receivable	2,600,000-2,350,000=250,000	2,850,000-2,575,000+250000=525,000
Total	3,061,210	5,141,460
CL
Billing on CIP	2,600,000	5,450,000(2600,000+2850,000)