Question

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,050,000. During 2021, costs of $2,020,000 were incurred, with estimated costs of $4,020,000 yet to be incurred. Billings of $2,524,000 were sent, and cash collected was $2,270,000.

In 2022, costs incurred were $2,524,000 with remaining costs estimated to be $3,630,000. 2022 billings were $2,774,000, and $2,495,000 cash was collected. The project was completed in 2023 after additional costs of $3,820,000 were incurred. The company’s fiscal year-end is December 31. This project does not qualify for revenue recognition over time.

Required:
1. Calculate the amount of revenue and gross profit or loss to be recognized in each of the three years.
2a. Prepare journal entries for 2021 to record the transactions described (credit "various accounts" for construction costs incurred).
2b. Prepare journal entries for 2022 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, 2021.
3b. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2022.

Answer 1

·         Note: Question states that Contract DOES NOT QUALIFY for revenue recognition over time. This means that revenue will be recorded when the contract gets completed.

• Requirements

Requirement 1
	2021	2022	2023
Revenue	$0	$0	$8,050,000
Gross Profits (Loss)	$0	$0	($314,000)

Requirement 2A
Date	Accounts title	Debit	Credit
2021	Construction in Progress	$2,020,000
	Various accounts		$2,020,000
	(construction cost incurred)
2021	Accounts receivables	$2,524,000
	Billing on Construction contracts		$2,524,000
	(amount billed during the year)
2021	Cash	$2,270,000
	Accounts receivables		$2,270,000
	(cash received)
Requirement 2B
Date	Accounts title	Debit	Credit
2022	Construction in Progress	$2,524,000
	Various accounts		$2,524,000
	(construction cost incurred)
2022	Accounts receivables	$2,774,000
	Billing on Construction contracts		$2,774,000
	(amount billed during the year)
2022	Cash	$2,495,000
	Accounts receivables		$2,495,000
	(cash received)

Requirement 3
Balance Sheet [Partial]	2021		2022
Current Assets:
Accounts receivables		$254,000		$533,000
Construction in progress	$2,020,000		$4,544,000
Less: Billings	($2,524,000)		($5,298,000)
Costs and profits in excess of billings		($504,000)		($754,000)
Current Liabilities:
Accounts Payable		$0		$0