Question

In: Accounting

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a...

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,150,000. During 2018, costs of $2,050,000 were incurred with estimated costs of $4,050,000 yet to be incurred. Billings of $2,550,000 were sent, and cash collected was $2,300,000.

In 2019, costs incurred were $2,550,000 with remaining costs estimated to be $3,675,000. 2019 billings were $2,800,000 and $2,525,000 cash was collected. The project was completed in 2020 after additional costs of $3,850,000 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.

Solutions

Expert Solution

Solution 1:

Computation of % of completion, revenue recognition and Gross Profit - Arrow Construction Company
Year Actual cost incurred (A) Total cost incurred till date (B) Total estimated Cost ( C ) % of completion (D) (B/C) Contract Price
(E)
Total Revenue to be recoganized (F) (E * D) Revenue for current period (G) Gross Profit (H)
2018 $2,050,000 $2,050,000 $6,100,000 33.61% $8,150,000 $2,738,934 $2,738,934 $688,934 $2,927,233 - $2,180,000
2019 $2,550,000 $4,600,000 $8,275,000 55.59% $8,150,000 $4,530,514 $1,791,579 -$813,934 $8,150,000 - $8,275,000 - $688,934
2020 $3,850,000 $8,450,000 $8,450,000 100.00% $8,150,000 $8,150,000 $3,619,486 -$175,000 $8,150,000 - $8,275,000 - $688,934 + $813,934

Solution 2a:

Journal Entries - Arrow Construction Company - 2018
Event Particulars Debit Credit
1 Construction in Progress Dr $2,050,000.00
       To Various Accounts $2,050,000.00
(To record construction cost incurred)
2 Accounts receivables Dr $2,550,000.00
       To Billings on construction contract $2,550,000.00
(To record progress billings)
3 Cash Dr $2,300,000.00
       To Accounts receivables $2,300,000.00
(To record collection from customer)
4 Construction in Progress Dr $688,934.00
Cost of construction Dr $2,050,000.00
       To Revenue from long term contracts $2,738,934.00
(To record revenue and gross profit)

Solution 2b:

Journal Entries - Arrow Construction Company - 2019
Event Particulars Debit Credit
1 Construction in Progress Dr $2,550,000.00
       To Various Accounts $2,550,000.00
(To record construction cost incurred)
2 Accounts receivables Dr $2,800,000.00
       To Billings on construction contract $2,800,000.00
(To record progress billings)
3 Cash Dr $2,525,000.00
       To Accounts receivables $2,525,000.00
(To record collection from customer)
4 Cost of construction Dr $2,605,513.00
       To Construction in Progress $813,934.00
       To Revenue from long term contracts $1,791,579.00
(To record revenue and gross profit)

Solution 3a & 3b:

Arrow construction company
Balance Sheet (Partial)
As on December 31
Particulars 2018 2019
Assets:
Current Assets:
Accounts Receivables
2018 - $2,550,000 - $2,300,000
2019 - $250,000 + $2,800,000 - $2,525,000
$250,000.00 $525,000.00
Cost and Profit in excess of billing
2018 - $2,738,934 - $2,550,000
$188,934.00
Liabilities and stockholder's equity:
Billings in excess of costs and profits
($2,800,000 - $2,550,000 + $813,934 - $188,934)
$875,000.00

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