Question

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,540,000. During 2018, costs of $2,180,000 were incurred with estimated costs of $4,180,000 yet to be incurred. Billings of $2,680,000 were sent, and cash collected was $2,430,000.

In 2019, costs incurred were $2,680,000 with remaining costs estimated to be $3,870,000. 2019 billings were $2,930,000 and $2,655,000 cash was collected. The project was completed in 2020 after additional costs of $3,980,000 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.

Answer 1

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Part 1
	2018	2019	2020
Contract price	$                                                    8,540,000	$                                                                                 8,540,000	$                                                                                 8,540,000
Actual costs to date	$                                                    2,180,000	$                                                                                 4,860,000	$                                                                                 8,840,000
Estimated costs to complete	$                                                    4,180,000	$                                                                                 3,870,000	$                                                                                                -
Total estimated costs	$                                                    6,360,000	$                                                                                 8,730,000	$                                                                                 8,840,000
Estimated gross profit
(actual in 2020)	$                                                    2,180,000	$                                                                                   -190,000	$                                                                                   -300,000
Revenue Recognition:	34.28%	55.67%
2018	$2,180,000/$6,360,000	= 34.28% x $8,540,000	$                                                                                 2,927,233
2019	$4,860,000/$8,730,000	= 55.67% x $8,540,000 = $4,754,227 – 2,927,233	$                                                                                 1,826,994
2020	$8,540,000-$2,927,233-$1,826,994		$                                                                                 3,785,773
Gross profit (loss) recognized:
2018	$2,927,233-$2,180,000		$                                                                                     747,233
2019	($190,000)-$747,233		$                                                                                  (937,233)
2020	($300,000)-($190,000)		$                                                                                   -110,000
Part 2a and 2b
		Year 2021	Year 2022
Construction in Progress		$                                                                                 2,180,000	$                                                                                 2,680,000
Various Accounts		$                                                                                 2,180,000	$                                                                                 2,680,000
Accounts Receivable		$                                                                                 2,680,000	$                                                                                 2,930,000
Billing on Construction Contracts		$                                                                                 2,680,000	$                                                                                 2,930,000
Cash		$                                                                                 2,430,000	$                                                                                 2,655,000
Accounts Receivable		$                                                                                 2,430,000	$                                                                                 2,655,000
Cost of Construction		$                                                                                    747,233
Construction in progress		$                                                                                 2,180,000
Revenue from long term contracts		$                                                                                 2,927,233
Cost of Construction			$                                                                                 2,764,227
Revenue from long term contracts			$                                                                                 1,826,994
Construction in progress			$                                                                                     937,233
Requirement 3a and 3b
		Year 2018	Year 2019
Current Assets:
Accounts Receivable		$                                                                                    250,000	$                                                                                     525,000
Costs and Profit $2,927,233in excess of billing $2,680,000		$                                                                                    247,233
Current Liabilities:
Billings $5,610,000 in excess of costs less loss			$                                                                                     940,000
($4,860,000-$190,000)=$4,670,000