Question

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,050,000. 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 $ 304,000 $ 1,595,000 Estimated costs to complete as of 12/31 1,216,000 0 Billings during the year 385,000 1,630,000 Cash collections during the year 260,000 1,755,000 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

Answer :-

1	Percentage completion method	2021	2022
	Cost incurred in till previous year	0	304,000
ADD	Cost incurred during the year	304,000	1,595,000
	Total cost incurred till date	304,000	1,899,000
ADD	Estimated cost to be incurred	1,216,000	0
	Total estimated cost to be incurred	1,520,000	1,899,000
	Percentage of completion (A)	20%	100%
	(cost incurred till date /total estimated cost )
	Total revenue (B)	2,050,000	2,050,000
	Total revenue recognized (A *B)	410,000	2,050,000
Less	Revenue recognized in previous year	0	410,000
	revenue recognized in current year	410,000	1,640,000
		2021	2022
	Revenue	410,000	1,640,000
Less	Cost incurred	304,000	1,595,000
	Gross profit	106,000	45,000

2) Gross profit and loss to be recognized

Revenue Gross profit

2021 0 0

2022   2,050,000 151,000

3)

prepare partial balance sheet: 2021

current asset:

cost and profit in excess of billing : $25,000 (304,000+106,000-385,000)

account receivebles: $125,000

current liabilities: 0

4.)

prepare the partial balance sheet of 2021 that does not qualify the recognized overtime:

current assets:

account receivable: $ 125000

current liabilities:

billing in excess of cost:(385,000- 304,000) = 81,000