Question
In: Accounting
On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a...
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.
Also, What is construction expenses to date for 2019?
Solutions
Expert Solution
| Percentages of completion | |||||
|---|---|---|---|---|---|
| Choose numerator | ÷ | Choose denominator | = | % complete to date | |
| 2018 | 2180000 | ÷ | 6360000 | = | 34.2767 % |
| 2019 | 4860000 | ÷ | 8730000 | = | 55.6701 % |
| 2020 | 100% | ||||
| 2018 | |||
|---|---|---|---|
| To date | Recognized in prior years | Recognized in 2018 | |
| Construction revenue |
2927233 (8,540,000 * 34.2767 %) |
2927233 | |
| Construction expense | 2180000 | 2180000 | |
| Gross profit (Loss) | 747233 | 747233 | |
| 2019 | |||
|---|---|---|---|
| To date | Recognized in prior years | Recognized in 2019 | |
| Construction revenue |
4754227 (8,540,000 * 55.6701%) |
2927233 | 1826994 |
| Construction expense | 4944227 | 2180000 | 2764227 |
| Gross profit (Loss) | (190000) | 747233 | (937233) |
| 2020 | |||
|---|---|---|---|
| To date | Recognized in prior years | Recognized in 2020 | |
| Construction revenue | 8540000 | 4754227 | 3785773 |
| Construction expense | 8840000 | 4944227 | 3895773 |
| Gross profit (Loss) | (300000) | (190000) | (110000) |
| Date | Account Title and Explanation | Debit | Credit |
| 2018 | Construction in progress | 2180000 | |
| Various accounts | 2180000 | ||
| 2018 | Accounts receivable | 2680000 | |
| Billings on construction contract | 2680000 | ||
| 2018 | Cash | 2430000 | |
| Accounts receivable | 2430000 | ||
| 2018 | Construction in progress | 747233 | |
| Cost of construction | 2180000 | ||
| Revenue from long-term contracts | 2927233 | ||
| 2018 | No journal entry required |
| Balance sheet | 2018 |
| Current Assets | |
| Accounts receivable | 2680000 |
| Costs and profit in excess of billings | 247233 |
| Current Liabilities: | |
| Billings in excess of costs less loss |
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