On February 1, 2018, Arrow Construction Company entered into a three-year constr

Question

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,500,000. During 2018, costs of $2,200,000 were incurred, with estimated costs of $4,200,000 yet to be incurred. Billings of $2,740,000 were sent, and cash collected was $2,450,000.

In 2019, costs incurred were $2,740,000 with remaining costs estimated to be $3,900,000. 2019 billings were $2,990,000, and $2,675,000 cash was collected. The project was completed in 2020 after additional costs of $4,000,000 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 2018 to record the transactions described (credit "various accounts" for construction costs incurred).
2b. Prepare journal entries for 2019 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, 2018.
3b. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2019.

Explanation / Answer

1) 2018 2019 2020 Revenue (Contract price) $8,500,000 $8,500,000 $8,500,000 Actual cost to date $2,200,000 $4,940,000 $8,940,000 Estimated cost to complete $4,200,000 $3,900,000 0 Total Estimated Costs $6,400,000 $8,840,000 $8,940,000 Gross profit /(loss) $2,100,000 -$340,000 -$440,000 Gross profit recognition = $2,1000,000/6,400,000 x Gross profit/loss $721,875 -$1,061,875 -$100,000 Actual cost to date 2018(given) $2,200,000 2019 = cost of 2018 + $2,740,000 $4,940,000 2020 = cost of 2019 + $4,000,000 $8,940,000 2018 Gross profit recognition = $2,200,000/6,400,000 x 2,200,000 $721,875 2019 GP = (-340,000) - 721,875 = -$1,061,875 2020 GP = (-440,000) - (-340,000) -$100,000 2018 Revenue recognition = $2,200,000/6,400,000 x $8,500,000 $2,921,875 2019 Revenue recognition = $4,940,000/8,840,000 x $8,500,000 $4,750,000 2018 2019 2020 Revenue Recongnized = Actual cost/ Total estimated cost x $8500000 $2,921,875 $1,828,125 Gross Profit (Loss) Recongnized $721,875 -$1,061,875 -$100,000 Revenue recognized to date = ($494000/8840000 x $850000) $4,750,000 Less: Revenue recognized in 2018 -2921875 Revenue recognized in 2019 $1,828,125 2) a) Journal Entries 2018 General Journal Debit Credit Construction in progress $2,200,000 Various accounts $2,200,000 Accounts receivable $2,740,000.00 Billings on construction contract $2,740,000.00 Cash $2,450,000.00 Accounts receivable $2,450,000.00 Construction in progress $721,875 Cost of construction $2,200,000 Revenue from long-term contracts $2,921,875 No Journal Entry b) Journal Entries 2019 Construction in progress $2,740,000.00 Various accounts $2,740,000.00 Accounts receivable $2,990,000.00 Billings on construction contract $2,990,000.00 Cash $2,675,000.00 Accounts receivable $2,675,000.00 No Journal Entry Cost of construction $2,890,000 Revenue from long-term contracts $1,828,125 Construction in progress (loss) $1,061,875.00 3) ( a & b) Balance sheet 2018 2019 Current assets: Accounts receivable $2,740,000.00 $5,730,000.00 Costs and profit in excess of billing (2,921875 - 2,740,000) $181,875 Current liabilities: $980,000.00 Billings ($5,730,000) in excess of costs less loss ($4,750,000)

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