On February 1, 2018, Arrow Construction Company entered into a three-year constr
ID: 2540456 • Letter: O
Question
On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,100,000. During 2018, costs of $2,040,000 were incurred, with estimated costs of $4,040,000 yet to be incurred. Billings of $2,548,000 were sent, and cash collected was $2,290,000.
In 2019, costs incurred were $2,548,000 with remaining costs estimated to be $3,660,000. 2019 billings were $2,798,000, and $2,515,000 cash was collected. The project was completed in 2020 after additional costs of $3,840,000 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.
Year
Revenue Recognized
Gross Profit (Loss) Recognized
2018
2019
-148000
2020
Total
2018/
Record the construction costs.
Record the progress billings.
Record the cash collections.
Record the expected loss.
2019/
Record the construction costs.
Record the progress billings.
Record the cash collections.
Record the expected loss.
Balance Sheet
At December 31, 2018
Current Assets:
Current Liabilities:
Balance Sheet
At December 31, 2019
Current Assets:
Current Liabilities:
Year
Revenue Recognized
Gross Profit (Loss) Recognized
2018
2019
-148000
2020
Total
Explanation / Answer
Percentage completion method 2018 2019 2020 Cost incurred in till previous year 0 2040000 4588000 ADD Cost incurred during the year 2040000 2548000 3840000 Total cost incurred till date 2040000 4588000 8428000 ADD Estimated cost to be incurred 4040000 3660000 0 Total estimated cost to be incurred 6080000 8248000 8428000 Percentage of completion (A) 34% 55.63% 100% (cost incurred till date /total estimated cost ) Total revenue (B) 8100000 8100000 8100000 Total revenue recognized (A *B) 2717763 4505674 8100000 Less Revenue recognized in previous year 0 2717763 4505674 revenue recognized in current year 2717763 1787911 3594326 2018 2019 2020 Revenue 2717763 1787911 3594326 Less Cost incurred 2040000 2548000 3840000 Gross profit 677763 -760089 -245674 2018 1 Construction in progress 2040000 Accounts payable 2040000 2 Contracts receivable 2548000 Progress billings 2548000 3 Construction in progress 677763 Construction expense 2040000 Construction revenue 2717763 4 Cash 2290000 Contract receivable 2290000 2019 1 Construction in progress 2548000 Accounts payable 2548000 2 Contracts receivable 2798000 Progress billings 2798000 3 Construction expense 2548000 Construction in progress 760089 Construction revenue 1787911 4 Cash 2515000 Contract receivable 2515000 Partial balance sheet Asset 2018 2019 Contract receivable 258000 541000 Cash 2290000 4805000 Net contruction in progress 2717763 4505674 Liabilities Accounts payable 2040000 4588000
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