On February 1, 2018, Arrow Construction Company entered into a three-year constr
ID: 2549435 • 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 $8,000,000. During 2018, costs of $2,000,000 were incurred with estimated costs of $4,000,000 yet to be incurred. Billings of $2,500,000 were sent, and cash collected was $2,250,000.
In 2019, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2019 billings were $2,750,000, and $2,475,000 cash was collected. The project was completed in 2020 after additional costs of $3,800,000 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 2018, 2019, and 2020 using the percentage of completion method?
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
Computation of Revenue Profit or loss for 2018
Contract price (A)
$8,000,000
Cost incurred in 2018 (B)
($2,000,000)
Estimated Cost for coming Years ©
($4,000,000)
Expected Profit or Loss (D) (A-B-C)
$2,000,000
Percentage of Completion (Working note 1) (E)
33.33%
Portion of gross profit to be recognized for the day (F) =(D)*(E)
666,600
Computation of Revenue profit or loss for 2019.
Contract price (A)
$8,000,000
Cost incurred in 2018 (B)
($2,000,000)
Cost Incurred in 2019
2500000
Estimated Cost for coming Years ©
3600000
Expected Profit or Loss (D) (A-B-C)
-100000
Loss to be Recognized = Profit Early recognized + loss
= 666600+-100000
-766600
2. a
Journal Entries for 2018
For Recording Expenses
Dr Construction in progress $ 2,000,000
Cr Various account (question instruct so) $2,000,000
Recognizing the issue of invoice
Dr Accounts Receivables 2,500,000
Cr Billing on Construction account. 2,500,000
Recognizing Revenue
Dr Construction Expense $2,000000
Dr Construction in Progress $ 666,600
CR Construction Revenue $2,666,600
Cash Received Against Bills Receivables
Dr Cash 2,250,000
Cr Bills Receivables 2,250,000
b. Entrees for 2019.
To record Incurred Cost
Dr Construction in progress $2,500,000
Cr Various Accounts. $2,250,000
To Record Issue of Invoice
Dr Accounts Receivables $2,475,000
Cr Billing on Construction Account. $2,475,000
To recognize revenue and Expenses
Dr Construction Expenses $2,500,000
Cr Construction Revenue $1,733,400
Cr Construction in progress $766,600
Cash Received Against invoice
Cash a/c Dr $2,250,000
To Bills Receivables $2,250,000
3. a
Balance Sheet as on December 31, 2018.
Current Asset
$
Cost and Estimated Earnings in Excess of Billing
1,66,600
Bills Receivable
250,000
3b.
Balance Sheet as on December 31st, 2019
Current Asset
$
Bills Receivables
525,000
Current liability
Bill in Excess of Cost and Estimated Earnings
575,000
Working Not 1.
(Cost incurred to date/(cost incurred +expected cost to complete)*100
($2,0000,000/($2,000,000+4,000,000))*1000
($2,000,000/$6,000,000) = 33.335
Notes
Balance Cost and Estimated Earnings in Excess of Billing IS BY Adjusting Debit Balance of construction in work in progress against billing On construction account. As the computation gives a positive balance it is traded as an asset. For Better Knowledge, I am placing a T account
Cost and Estimated Earnings in Excess of Billing (1st year)
Opening Balance
Nill
Construction in progress (1st journal)
$ 2,000,000
Billing on Construction account. (2nd Entry 1st year)
2,500,000
Construction Revenue
$ 666,600
Closing Balance
16660
The same Method is used in the second year also.
Contract price (A)
$8,000,000
Cost incurred in 2018 (B)
($2,000,000)
Estimated Cost for coming Years ©
($4,000,000)
Expected Profit or Loss (D) (A-B-C)
$2,000,000
Percentage of Completion (Working note 1) (E)
33.33%
Portion of gross profit to be recognized for the day (F) =(D)*(E)
666,600
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