Exercise 5-20 Long-term contract; revenue recognition upon project completion; l
ID: 2538381 • Letter: E
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.
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.
Year Revenue recognized Gross profit (loss) recognized 2018 $0 2019 0 2020 8,025,000 Total $8,025,000Explanation / Answer
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