Question

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,000,000. The project began in 2021 and was completed in 2022. Data relating to the contract are summarized below:

	2021			2022
Costs incurred during the year	$	300,000		$	1,575,000
Estimated costs to complete as of 12/31		1,200,000			0
Billings during the year		380,000			1,620,000
Cash collections during the year		250,000			1,750,000

Required:
1. Compute the amount of revenue and gross profit or loss to be recognized in 2021 and 2022 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 2021 and 2022 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 2021 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 2021 assuming this project does not qualify for revenue recognition over time.

Answer 1

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1) Revnue recognition via Percentage of completion method

% complete = cost incurred / total estimated cost

Particulars                                           2021                    2022

Cost incurred                                  300000  

Estimated cost to complete             1200000

Total cost                                         1500000

% completion                                     20%    

Total project revenue                      2,000,000          

Revenue for the year                         400000            1600000

Particulars	Total	2021 (20%)	2022
Revenue	2000000	400000	1600000
Less: Cost	1875000	300000	1575000
Gross Profit	125000	100000	25000

2) When the project does not qualify for revenue recognition over time, the complete revenue is recognized on completion of the project.

Particulars	Total	2021	2022
Revenue	2000000	--	2000000
Less: Cost	1875000	300000	1575000
Gross Profit	125000	-300000	425000

3) Partial balance sheet if revenue over time according to percentage of completion

Balance Sheet (Partial)
At December31, 2021
Current assets:
Accounts receivable (380000 - 250000)	130000

Cost and profit in excess of billings (300000 + 100000 - 380000)    20000

4) Prepare a partial balance sheet to show the information related to contract assuming this project does not qualify for revenue recognition over time.

Balance Sheet (Partial)
At December31, 2021
Current assets:
Accounts receivable (380000 - 250000)	130000
Current liabilities:
Billings in excess of costs (380000-30000)	80000