Question

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.

Answer 1

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