Assume Nortel Networks contracted to provide a customer with Internet infrastruc

Question

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,810,000. The project began i was completed in 2019. Data relating to the contract are summarized below: 2018 2019 Costs incurred during the year Estimated costs to complete as of 12/31 Billings during the year Cash collections during the year $ 368,000 $2,205,000 1,472,000 525,000 1,790,000 284,000 1,835,000 Required: 1. Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 assuming Nortel recognizes over time according to percentage of completion. 2. Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 assuming this project does 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 2 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 2 assuming this project does not qualify for revenue recognition over time Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3 Required 4 Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 assuming Nortel recognizes revenue over time according to percentage of completion. (Loss amounts should be indicated with a minus sign. Use percentages as calculated and rounded in the table below to arrive at your final answer.) Percentages of completion Choose numerator | | Choose denominator | = | % complete to date 2018 2019 2018 To date Recognized in prior years Recognized in 2018 Construction revenue Construction expense Gross profit (loss) 2019 To date Recognized in prior years Recognized in 2019 Construction revenue Construction expense

Explanation / Answer

Answer :-

Given,

1.

Explaination :-

$2,573,000

($368,000 + $2,205,000)

$970,000

($2,810,000 - $1,840,000)

$237,000

($2,810,000 - $2,573,000)

Revenue Recognization

% of Revenue in 2018 = Actual Cost to Date / Total Estimated Cost

= $368,000 / $1,840,000 = 20%

% of Revenue in 2019 = Actual Cost to Date / Total Estimated Cost

= $2,573,000 / $2,573,000 = 100%

Hence,

Revenue Regocnition in 2018 = Contract Price x % of Revenue - Previous Year Revenue Recognition

= $2,810,000 x 20% - $0 = $562,000

Revenue Recognition in 2019 = Contract Price x % of Revenue - Previous Year Revenue Recognition

= $2,810,000 x 100% - $562,000 = $2,810,000 - $562,000

= $2,248,000

Gross Profit Recognition

2018

Gross Profit = Construction Revenue - Construction Expense

= $562,000 - $368,000 = $194,000

2019

Gross Profit = Construction Revenue - Construction Expense

= ($2,810,000 - $562,000) - ($2,573,000 - $368,000)

= $2,248,000 - $2,205,000 = $43,000

2.

2018 : $ 0 (As the contract was not yet completed)

2019: Revenue - Expenses = Gross Profit

$2,810,000 - $2,573,000 = $237,000

3.

4.

Explaination of 3 & 4 :

Accounts Receivable = Billings During Year - Cash Received During Year

= $525,000 - $284,000 = $241,000

Billings in Excess of Cost = Billings during Year - Cost incurred during year

= $525,000 - $368,000 = $157,000

Cost & Profit in Excess of Billings = Gross Profit - Billings in Excess of Cost

= $194,000 - $157,000 = $37,000

2018 2019 Costs incurred during the Year $368,000 $2,205,000 Estimated costs to complete as of 12/31 $1,472,000 $0 Billings during the year $525,000 $1,790,000 Cash collections during the year $284,000 $1,835,000

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