Question

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,375,000. During 2021, costs of $2,150,000 were incurred, with estimated costs of $4,150,000 yet to be incurred. Billings of $2,680,000 were sent, and cash collected was $2,400,000.

In 2022, costs incurred were $2,680,000 with remaining costs estimated to be $3,825,000. 2022 billings were $2,930,000, and $2,625,000 cash was collected. The project was completed in 2023 after additional costs of $3,950,000 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.
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:
Computation of % of completion, revenue recognition and Gross Profit - Arrow Construction Company
Year	Actual cost incurred (A)	Total cost incurred till date (B)	Total estimated Cost ( C )	% of completion (D) (B/C)	Contract Price	Total Revenue to be recognized (F) (E * D)	Revenue for current period (G)	Gross Profit (H)
					(E)
2021	$2,150,000	$2,150,000	$6,300,000	34.13%	$8,375,000	$2,858,135	$2,858,135	$708,135
2022	$2,680,000	$4,830,000	$8,655,000	55.81%	$8,375,000	$4,673,744	$1,815,609	($988,135)
2023	$3,950,000	$8,780,000	$8,780,000	100.00%	$8,375,000	$8,375,000	$3,701,256	($125,000)

Solution 2a:
Journal Entries - Arrow Construction Company - 2021
Event	Particulars	Debit	Credit
1	Construction in Progress Dr	$2,150,000
	To Various Accounts		$2,150,000
	(To record construction cost incurred)
2	Accounts receivables Dr	$2,680,000
	To Billings on construction contract		$2,680,000
	(To record progress billings)
3	Cash Dr	$2,400,000
	To Accounts receivables		$2,400,000
	(To record collection from customer)
4	Construction in Progress Dr	$708,135
	Cost of construction Dr	$2,150,000
	To Revenue from long term contracts		$2,858,135
	(To record revenue and gross profit)
Solution 2b:
Journal Entries - Arrow Construction Company - 2022
Event	Particulars	Debit	Credit
1	Construction in Progress Dr	$2,680,000
	To Various Accounts		$2,680,000
	(To record construction cost incurred)
2	Accounts receivables Dr	$2,930,000
	To Billings on construction contract		$2,930,000
	(To record progress billings)
3	Cash Dr	$2,625,000
	To Accounts receivables		$2,625,000
	(To record collection from customer)
4	Cost of construction Dr	$2,803,744
	To Construction in Progress		$988,135
	To Revenue from long term contracts		$1,815,609
	(To record revenue and gross profit)
Solution 3:
Arrow construction company
Balance Sheet (Partial)
As on December 31
Particulars		2021	2022
Assets:
Current Assets:
Accounts Receivables		$280,000	$585,000
Cost and Profit in excess of billing		$178,135
Liabilities and stockholder's equity:
Billings in excess of costs and profits			$1,060,000