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

Percentage completion method 2018 2019 2020 Cost incurred in till previous year 0 2000000 4500000 ADD Cost incurred during the year 2000000 2500000 3800000 Total cost incurred till date 2000000 4500000 8300000 ADD Estimated cost to be incurred 4000000 3600000 0 Total estimated cost to be incurred 6000000 8100000 8300000 Percentage of completion (A) 33.33% 55.56% 100% (cost incurred till date /total estimated cost ) Total revenue (B) 8000000 8000000 8000000 Total revenue recognized (A *B) 2666667 4444444 8000000 Less Revenue recognized in previous year 0 2666667 4444444 revenue recognized in current year 2666667 1777778 3555556 2018 2019 2020 Revenue 2666667 1777778 3555556 Less Cost incurred 2000000 2500000 3800000 Gross profit 666667 -722222 -244444

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