Question

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,300,000. The project began in 2018 and was completed in 2019. Data relating to the contract are summarized below:

	2018			2019
Costs incurred during the year	$	324,000		$	1,800,000
Estimated costs to complete as of 12/31		1,296,000			0
Billings during the year		410,000			1,680,000
Cash collections during the year		262,000			1,780,000

Required:
1. Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 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 2018 and 2019 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 2018 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 2018 assuming this project does not qualify for revenue recognition over time.

Answer 1

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	Contract % Completion
Part 1	Part 1: Amount of Gross profit recognized each year
	Year 2018
	Cost incurred during the year		$           324,000
	Add: Estimated cost to complete as of year end		$       1,296,000
	Estimated Total cost		$       1,620,000
	% Completion		20%
	2079000/7700000
	Revenue to be recognized	2300000*20%	$           460,000
	Less: Cost incurred		$           324,000
	Gross Profit to be recognized		$           136,000
	Year 2019
	Cost incurred during the year (324000+1800000)	A	$       2,124,000
	Add: Estimated cost to complete as of year end		$                       -
	Estimated Total cost	B	$       2,124,000
	% Completion	A/B	100.00%
	Revenue to be recognized	2300000*100%	$       2,300,000
	Already recognized till 2018		$           460,000
	To be recognized in 2019		$       1,840,000
	Less: Cost incurred		$       1,800,000
	Gross Profit to be recognized		$             40,000
Part 2		2018	2019
	Gross Revenue	0	$       2,300,000
	Gross Profit	0	$           176,000
Part 3
		2018
	Current Assets:
	Accounts Receivable 410000-262000		$           148,000
	Construction in Progress	$           460,000
	Less Billings	$           410,000
	Costs and profit in excess of billing		$             50,000
Part 4
		2018
	Current Assets:
	Accounts Receivable 410000-262000		$           148,000
	Current Liabilities:
	Construction in Progress	$           460,000
	Less Billings	$           324,000
	Costs and profit in excess of billing		$           136,000