Question

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,050,000. The project began in 2018 and was completed in 2019. Data relating to the contract are summarized below:

20182019

Costs incurred during the year$304,000 $1,595,000

Estimated costs to complete as of 12/31 1,216,000  0

Billings during the year 385,000  1,630,000

Cash collections during the year 252,000  1,755,000

Required:
1. 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.
2. Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 assuming this project does not qualify 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 2018 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 2018 assuming this project does not qualify for revenue recognition over time.

• 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 Gross profit (loss)

Answer 1

1) Calculation of the amount of revenue recognition for 2018 & 2019
Revenue recognition 2018 = contract price*(actual cost to date/total estimated cost)
2050000*(304000/1520000)
2050000*20% = 410000
Revenue recognition (2019) = contract price-revenue recognition in 2018
revenue recognistion (2019) = 2050000-410000
Revenue recognition (2019) = 1640000
Calculation of gross profit recognition
Gross profit recognition 2018 = revenue recognition 2018-actual cost to date
410000-304000 = 106000
Gross profit recognition 2019 = revenue recognition 2019-actual cost to date
1640000-1595000 = 45000
2) Calculation of amount revenue recognition
project does not quality for revenue recognistion overtime
therefore no revenue recognition for 2018 & 19
Amount of gross profit recognition for 2018 ,2019
gross profit in 2018 is 0 , contract is not completed
gross profit recognition 2019
contract price-actual cost to date
2050000-1899000 = 151000
3) Balance sheet (partial)
Current assets
accout receivable			133000
(385000-252000)
Cost & profit in excess of billing			25000
Cost & profit in excess of billing = total cost & profit-billing amount
Cost & profit in excess of billing = (304000+106000)-385000
cost & profit in excess = 25000
4) Balance sheet (partial)
Current assets
Accounts receivable			133000
current laibilities
billing in excess of costs			81000
Billing in excess of cost = Billing amount-costs
Billing in excess of cost = 385000-304000 = 81000