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 $8,000,000. 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

Year Percentage of Completion Actual costs to Date / Estimated Total Costs = % completion to date 2018 2000000 / 6000000 = 33.33% 2019 4500000 / 8100000 = 55.56% 2020 8300000 / 8300000 = 100.00% 2018 To Date Recognized in Prior Years Recognized in 2018 Construction Revenue 2666667 0 2666667 Construction cost 2000000 0 2000000 Gros Profit (Loss) 666667 666667 2019 To Date Recognized in Prior Years Recognized in 2018 Construction Revenue 4444444 2666667 1777778 Construction cost 4500000 2000000 2500000 Gros Profit (Loss) -55556 -722222 2020 To Date Recognized in Prior Years Recognized in 2018 Construction Revenue 8000000 4444444 3555556 Construction cost 8300000 4500000 3800000 Gros Profit (Loss) -300000 -244444 2.a. For the year 2018 Account Title Debit Credit Contract in progress 2000000 Accounts Payable 2000000 (Costs incurred during the year) Accounts Receivable 2500000 Billings 2250000 (Billings sent for collection) Cash 2250000 Accounts Receivable 2250000 (Cash collected against billings) Contract costs 2000000 Contract in progress 666667 Revenue 2666667 (Revenue and gross profit recognised) 2.b. For the year 2019 Account Title Debit Credit Contract in progress 2500000 Accounts Payable 2500000 (Costs incurred during the year) Accounts Receivable 2750000 Billings 2750000 (Billings sent for collection) Cash 2475000 Accounts Receivable 2475000 (Cash collected against billings) Contract costs 2500000 Contract in progress 722222 Revenue 1777778 (Revenue and gross profit recognised) Balance Sheet (Partial) as at December 31, 2018 Assets Current Assets Accounts Receivable 250000 Liabilities Contract in progress 83333 Balance Sheet (Partial) as at December 31, 2019 Assets Current Assets Accounts Receivable 525000 Liabilities Contract in progress 3305555

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