On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,350,000. During 2021, costs of $2,140,000 were incurred, with estimated costs of $4,140,000 yet to be incurred. Billings of $2,668,000 were sent, and cash collected was $2,390,000.
In 2022, costs incurred were $2,668,000 with remaining costs estimated to be $3,810,000. 2022 billings were $2,918,000, and $2,615,000 cash was collected. The project was completed in 2023 after additional costs of $3,940,000 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.
step 1)
| 2021 | 2022 | 2023 | |
| contract price(A) | 8,350,000 | 8,350,000 | 8,350,000 |
cost incur during year | 2,140,000 | 2,668,000 | 3,940,000 |
add previous year cost incur | + 0 | + 2,140,000 | +4,808,000 |
cost incur til date | 2,140,000 | 4,808,000 | 8,748,000 |
estimated cost to complete | +4,140,000 | +3,810,000 | +0 |
total estimated construction cost (B) | 6,280,000 | 8,618,000 | 8,748,000 |
estimated gross profit (loss) (A minus B) | 2,070,000 | (268,000) | (398,000) |
gross profit (loss) | 0 | (268,000) | (398,000) |
less: gross profit (loss) recognized in previous years | 0 | 0 | +268,000 |
gross profit (loss) to be recognized | 0 | (268,000) | (130,000) |
Req 1) Answer:
| year | revenue recognized | gross profit (loss) recognized |
| 2021 | 0 | 0 |
| 2022 | 0 | (268,000) |
| 2023 | 8,350,000 | (130,000) |
| total | 8,350,000 | (398,000) |
req 2A) Answer:
journal entry 1)
dr. construction in progress 2,140,000
cr. various accounts 2,140,000
(record construction cost) Answer is from 2021 cost incur during year
journal entry 2)
dr. Account recievable (A/R) 2,668,000
cr. billings on construction contract 2,668,000
(record progress billing) answer is from billing sent 2021 on the question
journal entry 3)
dr. cash 2,390,000
cr. A/R 2,390,000
(record cash collection) Answer from 2021 cash collected on the question.
Journal entry 4) no journal entry required
Req 2B) Answer:
journal entry 1)
dr. construction in progress 2,668,000
cr. various accounts 2,668,000
(record construction cost) answer is from 2022 cost incur during year
journal entry 2)
dr. A/R 2,918,000
cr.billing on construction contract 2,918,000
(record progress billing) answer is from 2022 billing sent on the question
journal entry 3)
dr. cash 2,615,000
cr. A/R 2,615,000
(record cash collection) answer is from cash collected 2022 on the question
journal entry 4)
dr. loss on long term contract 268,000
cr. construction in progress 268,000
(record loss) answer from 2022 gross profit (loss)
Req 3A)
A/R 2021
billings 2,668,000
less: cash collections (2,390,000)
A/R 278,000 current assets
billing in excess of cost 2021
billing made in 2021 2,668,000
less: cost incurred (2021) (2,140,000)
billing in excess of cost 528,000 current liabilities
Answer:
Balance sheet |
| current assets: | |
| Account receivable | 278,000 |
| current liabilities | |
| billing in excess of cost | 528,000 |
Req3B)
A/R as of 12/31/21 278,000
billings (2022) 2,918,000
less: cash collection (2022) (2,615,000)
A/R as on 12/31/22 581,000 current assets
Billing in excess of cost less (loss) 528,000
billing in excess of cost 2021 +2,918,000
add: billings made during year 2022 3,446,000
less: construction cost incur 2022 2,668,000
loss (268,000)
total: -2,400,000
billings in excess of cost less (loss) 2022 1,046,000
current liabilities
Answer:
| current assets: | |
| Account receivable | 581,000 |
| current liabilities | |
| billing in excess of cost less loss | 1,046,000 |
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