Question

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2018, costs of $2,000,000 were incurred with estimated costs of $4,000,000 yet to be incurred. Billings of $2,500,000 were sent, and cash collected was $2,250,000.

In 2019, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2019 billings were $2,750,000, and $2,475,000 cash was collected. The project was completed in 2020 after additional costs of $3,800,000 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

Answer 1

Computation of Revenue Profit or loss for 2018

Contract price (A)	$8,000,000
Cost incurred in 2018 (B)	($2,000,000)
Estimated Cost for coming Years ©	($4,000,000)
Expected Profit or Loss (D) (A-B-C)	$2,000,000
Percentage of Completion (Working note 1) (E)	33.33%
Portion of gross profit to be recognized for the day (F) =(D)*(E)	666,600

Computation of Revenue profit or loss for 2019.

Contract price (A)	$8,000,000
Cost incurred in 2018 (B)	($2,000,000)
Cost Incurred in 2019	2500000
Estimated Cost for coming Years ©	3600000
Expected Profit or Loss (D) (A-B-C)	-100000
Loss to be Recognized = Profit Early recognized + loss = 666600+-100000	-766600

2. a

Journal Entries for 2018

For Recording Expenses

Dr Construction in progress $ 2,000,000

   Cr Various account (question instruct so) $2,000,000

Recognizing the issue of invoice

Dr Accounts Receivables     2,500,000

      Cr   Billing on Construction account. 2,500,000

Recognizing Revenue

Dr Construction Expense     $2,000000

Dr Construction in Progress $ 666,600

CR    Construction Revenue     $2,666,600

Cash Received Against Bills Receivables

Dr Cash     2,250,000

     Cr Bills Receivables   2,250,000

b. Entrees for 2019.

To record Incurred Cost

Dr Construction in progress $2,500,000

    Cr Various Accounts.    $2,250,000

To Record Issue of Invoice

Dr Accounts Receivables $2,475,000

   Cr Billing on Construction Account. $2,475,000

To recognize revenue and Expenses

Dr   Construction Expenses $2,500,000

Cr Construction Revenue   $1,733,400

   Cr Construction in progress   $766,600

Cash Received Against invoice

Cash a/c Dr     $2,250,000

     To Bills Receivables $2,250,000

3. a

Balance Sheet as on December 31, 2018.        

Current Asset	$
Cost and Estimated Earnings in Excess of Billing	1,66,600
Bills Receivable	250,000

3b.

Balance Sheet as on December 31^st, 2019

Current Asset	$
Bills Receivables	525,000
Current liability
Bill in Excess of Cost and Estimated Earnings	575,000

Working Not 1.

(Cost incurred to date/(cost incurred +expected cost to complete)*100

($2,0000,000/($2,000,000+4,000,000))*1000

($2,000,000/$6,000,000) = 33.335

Notes

Balance   Cost and Estimated Earnings in Excess of Billing IS BY Adjusting Debit Balance of construction in work in progress against billing On construction account. As the computation gives a positive balance it is traded as an asset. For Better Knowledge, I am placing a T account

Cost and Estimated Earnings in Excess of Billing (1^st year)

Opening Balance	Nill
Construction in progress (1st journal)	$ 2,000,000	Billing on Construction account. (2nd Entry 1st year)	2,500,000
Construction Revenue	$ 666,600	Closing Balance	16660

The same Method is used in the second year also.