Question

Exercise 5-20 Long-term contract; revenue recognition upon project completion; loss projected on entire project [LO5-8, 5-9] On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,025,000. During 2018, costs of $2,010,000 were incurred, with estimated costs of $4,010,000 yet to be incurred. Billings of $2,512,000 were sent, and cash collected was $2,260,000.

In 2019, costs incurred were $2,512,000 with remaining costs estimated to be $3,615,000. 2019 billings were $2,762,000, and $2,485,000 cash was collected. The project was completed in 2020 after additional costs of $3,810,000 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.

	Year Revenue recognized Gross profit (loss) recognized 2018 $0 2019 0 2020 8,025,000 Total $8,025,000

2b. Prepare journal entries for 2019 to record the transactions described (credit "various accounts" for construction costs incurred).

No	Year	General Journal	Debit	Credit
1	2019	Construction in progress	2,512,000
		Various accounts		2,512,000
2	2019	Accounts receivable	2,762,000
		Billings on construction contract		2,762,000
3	2019	Cash	2,485,000
		Accounts receivable		2,485,000
4	??? Record the expected loss	????

3a. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2018.

	Balance Sheet At December 31, 2018 Current assets: Accounts receivable $252,000 Construction in progress 2,010,000 Current liabilities:

3b. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2019.

	Balance Sheet At December 31, 2019 Current assets: Accounts receivable Construction in progress Current liabilities:

Answer 1

Statement showing Revenue recogniztion for each year
	2018	2019	2020	Total
Revenue recognized in Current year	$2,648,250	$1,845,750	$3,531,000	$8,025,000
Cost Incurred in Current Year	$2,010,000	$2,512,000	$3,810,000	$8,332,000
Gross Profit	$638,250	-$666,250	-$279,000	-$307,000
Working Notee
Statement showing Revenue recogniztion for each year
	2018	2019	2020
Contract Price	$8,025,000.00
% of Cost of Completion	33%	56%	100%
Revenue recognised to be recognized as on (a)	$2,648,250	$4,494,000	$8,025,000
Revenue recognized in previous year (b)	$0	$2,648,250	$4,494,000
Revenue recognized in Current year (a-b)	$2,648,250	$1,845,750	$3,531,000
Computation of Percentage of cost of Completion
	2018	2019	2020
Cost incurred in Previous Year	$0	$2,010,000	$4,522,000
Cost incurred during the year	$2,010,000	$2,512,000	$3,810,000
Total Cost Incurred till date	$2,010,000	$4,522,000	$8,332,000
Estminated cost to Complete at end of of year	$4,010,000	$3,615,000	$0
Total Estimated Cost of Completion	$6,020,000	$8,137,000	$8,332,000
% of Cost of Completion	33%	56%	100%
( Cost incurred as on /Total cost of Completion)
	2.b Journal Entries
	No.	Year	General Journal	Debit	Credit
	1	2019	Construction in progress	$2,512,000.00
			Various Account		$2,512,000.00
	2	2019	Account Receivable	$2,762,000.00
			Billing on Construction Contract		$2,762,000.00
	3
		2019	Cash	$2,485,000.00
			Account Receivable		$2,485,000.00
	4	2019	Construction Expense	$2,512,000.00
			Costruction Loss		$666,250.00
			Construction Revenue		$1,845,750.00
			3.a. Balancesheet at Dec 31,2018
			Current Asset
			Account Receivable	252000
			Construction in progress	2010000
			Current Liabilities
			3.b. Balancesheet at Dec 31,2018
			Current Asset
			Account Receivable	277000
			Construction in progress	4522000
			Current Liabilities