Question

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,500,000. During 2018, costs of $2,200,000 were incurred, with estimated costs of $4,200,000 yet to be incurred. Billings of $2,740,000 were sent, and cash collected was $2,450,000.

In 2019, costs incurred were $2,740,000 with remaining costs estimated to be $3,900,000. 2019 billings were $2,990,000, and $2,675,000 cash was collected. The project was completed in 2020 after additional costs of $4,000,000 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 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.

Answer 1

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	$2,200,000	$2,200,000	$6,400,000	34.38%	$8,500,000	$2,921,875	$2,921,875	$721,875	$2,921,875 - $2,200,000
2019	$2,740,000	$4,940,000	$8,840,000	55.88%	$8,500,000	$4,750,000	$1,828,125	-$1,061,875	$8,500,000 - $8,840,000 - $721,875
2020	$4,000,000	$8,940,000	$8,940,000	100.00%	$8,500,000	$8,500,000	$3,750,000	-$100,000	$8,500,000 - $8,940,000 - $721,875 + $1,061,875

Solution 2a:

Journal Entries - Arrow Construction Company - 2018
Event	Particulars	Debit	Credit
1	Construction in Progress Dr	$2,200,000.00
	To Various Accounts		$2,200,000.00
	(To record construction cost incurred)
2	Accounts receivables Dr	$2,740,000.00
	To Billings on construction contract		$2,740,000.00
	(To record progress billings)
3	Cash Dr	$2,450,000.00
	To Accounts receivables		$2,450,000.00
	(To record collection from customer)
4	Construction in Progress Dr	$721,875.00
	Cost of construction Dr	$2,200,000.00
	To Revenue from long term contracts		$2,921,875.00
	(To record revenue and gross profit)

Solution 2b:

Journal Entries - Arrow Construction Company - 2019
Event	Particulars	Debit	Credit
1	Construction in Progress Dr	$2,740,000.00
	To Various Accounts		$2,740,000.00
	(To record construction cost incurred)
2	Accounts receivables Dr	$2,990,000.00
	To Billings on construction contract		$2,990,000.00
	(To record progress billings)
3	Cash Dr	$2,675,000.00
	To Accounts receivables		$2,675,000.00
	(To record collection from customer)
4	Cost of construction Dr	$2,890,000.00
	To Construction in Progress		$1,061,875.00
	To Revenue from long term contracts		$1,828,125.00
	(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 - $2,740,000 - $2,450,000 2019 - $290,000 + $2,990,000 - $2,675,000	$290,000.00	$605,000.00
Cost and Profit in excess of billing 2018 - $2,921,875 - $2,740,000	$181,875.00
Liabilities and stockholder's equity:
Billings in excess of costs and profits ($2,990,000 - $2,740,000 + $1,061,875 - $181,875)		$1,130,000.00