Question

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,330,000. During 2021, costs of $2,110,000 were incurred with estimated costs of $4,110,000 yet to be incurred. Billings of $2,610,000 were sent, and cash collected was $2,360,000.

In 2022, costs incurred were $2,610,000 with remaining costs estimated to be $3,765,000. 2022 billings were $2,860,000 and $2,585,000 cash was collected. The project was completed in 2023 after additional costs of $3,910,000 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 2021, 2022, and 2023 using the percentage of completion method.
2a. Prepare journal entries for 2021 to record the transactions described (credit "various accounts" for construction costs incurred).
2b. Prepare journal entries for 2022 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, 2021.
3b. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2022.

Answer 1

Solution 1:
Percentage of Completion
	Choose Numerator	/	Choose Denominator	=	% of completion to date
	Cost incurred to date	/	Total estimated costs	=	% of completion to date
2021	$2,110,000	/	$6,220,000	=	33.92%
2022	$4,720,000	/	$8,485,000	=	55.63%
2023	$8,630,000	/	$8,630,000	=	100.00%
2021
	To Date	Recognized in Prior Years	Recognized in 2021
Construction revenue	$2,825,772	$0	$2,825,772
Construction expense	$2,110,000	$0	$2,110,000
Gross Profit (Loss)	$715,772	$0	$715,772
2022
	To Date	Recognized in Prior Years	Recognized in 2022
Construction revenue	$4,633,777	$2,825,772	$1,808,006
Construction expense	$4,788,777	$2,110,000	$2,678,777
Gross Profit (Loss)	-$155,000	$715,772	-$870,772
2023
	To Date	Recognized in Prior Years	Recognized in 2023
Construction revenue	$8,330,000	$4,633,777	$3,696,223
Construction expense	$8,630,000	$4,788,777	$3,841,223
Gross Profit (Loss)	-$300,000	-$155,000	-$145,000

Solution 2a:
Journal Entries - Arrow Construction Company - 2021
Event	Particulars	Debit	Credit
1	Construction in Progress Dr	$2,110,000
	To Various Accounts		$2,110,000
	(To record construction cost incurred)
2	Accounts receivables Dr	$2,610,000
	To Billings on construction contract		$2,610,000
	(To record progress billings)
3	Cash Dr	$2,360,000
	To Accounts receivables		$2,360,000
	(To record collection from customer)
4	Construction in Progress Dr	$715,772
	Cost of construction Dr	$2,110,000
	To Revenue from long term contracts		$2,825,772
	(To record revenue and gross profit)
Solution 2b:
Journal Entries - Arrow Construction Company - 2022
Event	Particulars	Debit	Credit
1	Construction in Progress Dr	$2,610,000
	To Various Accounts		$2,610,000
	(To record construction cost incurred)
2	Accounts receivables Dr	$2,860,000
	To Billings on construction contract		$2,860,000
	(To record progress billings)
3	Cash Dr	$2,585,000
	To Accounts receivables		$2,585,000
	(To record collection from customer)
4	Cost of construction Dr	$2,678,777
	To Construction in Progress		$870,772
	To Revenue from long term contracts		$1,808,006
	(To record revenue and gross profit)

Solution 3a & 3b:
Arrow construction company
Balance Sheet (Partial)
As on December 31
Particulars	2021	2022
Assets:
Current Assets:
Accounts Receivables 2021 - $2,610,000 - $2,360,000 2022 - $250,000 + $2,860,000 - $2,585,000	$250,000	$525,000
Cost and Profit in excess of billing 2021 - $2,825,772 - $2,610,000	$215,772
Liabilities and stockholder's equity:
Current liabilities:
Billings in excess of costs and profits ($2,860,000 - $2,610,000 + $870,772 - $215,772)		$905,000