Question
In: Accounting
On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a...
On February 1, 2021, Arrow Construction Company entered into a
three-year construction contract to build a bridge for a price of
$8,225,000. During 2021, costs of $2,090,000 were incurred, with
estimated costs of $4,090,000 yet to be incurred. Billings of
$2,608,000 were sent, and cash collected was $2,340,000.
In 2022, costs incurred were $2,608,000 with remaining costs
estimated to be $3,735,000. 2022 billings were $2,858,000, and
$2,565,000 cash was collected. The project was completed in 2023
after additional costs of $3,890,000 were incurred. The company’s
fiscal year-end is December 31. This project does not qualify for
revenue recognition over time.
Required:
1. Calculate the amount of revenue and gross
profit or loss to be recognized in each of the three years.
Solutions
Expert Solution
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| Arrow | ||||
| Particulars | 2021 | 2022 | 2023 | Note |
| Contract Price | 8,225,000 | 8,225,000 | 8,225,000 | A |
| Cost Incurred during the year | 2,090,000 | 2,608,000 | 3,890,000 | C |
| Cost Incurred to date | 2,090,000 | 4,698,000 | 8,588,000 | |
| Estimated cost to complete | 4,090,000 | 3,735,000 | - | D |
| Estimated total cost | 6,180,000 | 8,433,000 | 8,588,000 | E=C+B |
| (Cost Incurred to date+ Estimated cost to complete ) | ||||
| Percentage complete | 33.82% | 55.71% | 100.00% | F=B/E |
| (Cost Incurred to date/Estimated total cost) | ||||
| Revenue to be recognized | 2,781,594 | 1,800,530 | 3,642,876 | G |
| Gross Profit/(Loss) | 691,594 | (807,470) | (247,124) | H=G-C |
| Formula of revenue to be recognized |
| (Contract Price*Percentage complete)- revenue previously recognized |
| Year 2021: 33.82% completed. Revenue recognized = 33.82% x $ 8,225,000 = $ 2,781,594. |
| Year 2022: 55.71% completed. Revenue recognized = 55.71% x $ 8,225,000 – $ 2,781,594 (previously recognized) = $ 1,800,530. |
| Year 2023: 100% completed. Revenue recognized = 100% x $ 8,225,000 – $ 2,781,594 $ 1,800,530 (previously recognized) = $ 3,642,876. |
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