Question

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,510,000. During 2021, costs of $2,170,000 were incurred with estimated costs of $4,170,000 yet to be incurred. Billings of $2,670,000 were sent, and cash collected was $2,420,000.
In 2022, costs incurred were $2,670,000 with remaining costs estimated to be $3,855,000. 2022 billings were $2,920,000 and $2,645,000 cash was collected. The project was completed in 2023 after additional costs of $3,970,000 were incurred. The company’s fiscal year-end is December 31. Arrow recognizes revenue over time according to the percentage of completion.

Required:
1. Compute the amount of revenue and gross profit or loss to be recognized in 2021, 2022, and 2023 using the percentage of completion method.
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

Answer:

1.                  2021 2022 2023

revenue       2912973 3399745       2197282

costs        2170000 2670000      3970000

gross profit        742973 729745       -1772718

2a. Debit Contract account 2912973, Credit revenue 2912973

Debit Bridge in progress 2170000 credit various accounts 2170000

Debit Accounts Receivable 2670000, Billing on CIP  2670000

Debit Bank  2420000, credit Accounts receivables 2420000

2b. Debit Contract account 3399745, Credit Revenue 3399745

debit work in progress 2670000, credit Various accounts

debit Accounts receivables 2920000, Billing on CIP 2920000

Debit bank 2645000, credit accounts receivables 2645000

3a. BALANCE SHEET 2021

current assets

accounts receivables         250000

Liabilities

billing                                  2670000

3b. current Assets  

Accounts receivables        275000

Liabilities

Billing                                2920000            

Explanation:

percentage of completion = cost incurred for start to date/ total estimated costs

percentation of completion  

2021 2022 2023

34.23% 74.18% 100

Revenue to be recognised = total revenue * percentage completed

current period revenue = revenue to be recognise - prior revenue