Question
In: Accounting
Exercise 6-19 (Algo) Long-term contract; revenue recognition over time and at a point in time [LO6-9]...
Exercise 6-19 (Algo) Long-term contract; revenue recognition over time and at a point in time [LO6-9] Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,100,000. 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 $ 308,000 $ 1,615,000 Estimated costs to complete as of 12/31 1,232,000 0 Billings during the year 390,000 1,640,000 Cash collections during the year 270,000 1,760,000 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.
Solutions
Expert Solution
| 1.Percentages of completion | |||||
| Choose numerator | ÷ | Choose denominator | = | % complete to date | |
| 2021 | 308000 | ÷ | 1540000 | = | 20% |
| 2022 | 1923000 | ÷ | 1923000 | = | 100% |
| 2021 | |||||
| To date | Recognized in prior years | Recognized in 2021 | |||
| Construction revenue | $ 4,20,000 | $ - | $ 4,20,000 | ||
| Construction expense | $ -3,08,000 | $ - | $ -3,08,000 | ||
| Gross profit (loss) | $ 1,12,000 | $ - | $ 1,12,000 | ||
| 2022 | |||||
| To date | Recognized in prior years | Recognized in 2022 | |||
| Construction revenue | $ 21,00,000 | $ 4,20,000 | $ 16,80,000 | ||
| Construction expense | $ -19,23,000 | $ -3,08,000 | $ -16,15,000 | ||
| Gross profit (loss) | $ 1,77,000 | $ 1,12,000 | $ 65,000 |
| 2 | ||
| Revenue | Gross Profit (Loss) | |
| 2021 | 0 | 0 |
| 2022 | $21,00,000 | $1,77,000 |
3.
| Balance Sheet (Partial) | |
| At December 31, 2021 | |
| Current assets: | |
| Account Receivables | $ 1,20,000 |
| Costs and Profit in excess of billing | $ 30,000 |
| Current liabilities: |
4.
| Balance Sheet (Partial) | |
| At December 31, 2021 | |
| Current assets: | |
| Account Receivables | $ 1,20,000 |
| Current liabilities: | |
| Billing in excess of cost | $ 82,000 |
Working Note:
| 2021 | 2022 | |
| Contract | $ 21,00,000 | $ 21,00,000 |
| Cost incurred | $ 3,08,000 | $ 19,23,000 |
| Estimated cost to complete as of 12/31 | $ 12,32,000 | $ - |
| Estimated cost | $ 15,40,000 | $ 19,23,000 |
| Gross Profit | $ 5,60,000 | $ 1,77,000 |
| Revenue Recognised | ||
| 2021: (308,000/1540000)*2100000 | $ 4,20,000 | |
| 2022:(2100000-420000) | $ 16,80,000 | |
| 2021 GP(420000-308000) | $ 1,12,000 | |
| 2022 GP(1680000-1615000) | $ 65,000 |
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