In February 1, 2016, Arrow Construction Company entered into a three-year constr
ID: 2417440 • Letter: I
Question
In February 1, 2016, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2016, 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 2017, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2017 billings were $2,750,000, and $2,475,000 cash was collected. The project was completed in 2018 after additional costs of $3,800,000 were incurred. The company’s fiscal year-end is December 31. This project does not qualify for revenue recognition over time.
1. Calculate the amount of revenue and gross profit or loss to be recognized in each of the three years.
2. Prepare journal entries for 2016 and 2017 to record the transactions described (credit various accounts for
construction costs incurred).
3. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2016 and 2017.
In February 1, 2016, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2016, 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 2017, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2017 billings were $2,750,000, and $2,475,000 cash was collected. The project was completed in 2018 after additional costs of $3,800,000 were incurred. The company’s fiscal year-end is December 31. This project does not qualify for revenue recognition over time.
Explanation / Answer
1. in 2016
the estimated profit of Construction=$8,000,000-$2,000,000-$4,000,000=$2,000,000
Total cost =$6,000,000
so revenue to recognised in 2016=$8,000,000*$2,000,000/$6,000,000=$2,666,667
The profit recongnised to be=$2,666,667-$2,000,000=$666,667
In 2017
the estimated profit of Construction=$8,000,000-$2,500,000-$3,600,000=$1,900,000
Total cost =$6,100,000
so revenue to recognised in 2016=$8,000,000*$2,500,000/$6,100,000=$3,278,688.52
The total profit recongnised to be=$3,278,688.52-$2,500,000=$778,688.52
The profit to recognised in 2017=$778.688.52-$666,667=$112,021.52