Question

On February 1, 2021, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,210,000. During 2021, costs of $2,070,000 were incurred with estimated costs of $4,070,000 yet to be incurred. Billings of $2,570,000 were sent, and cash collected was $2,320,000.
In 2022, costs incurred were $2,620,000 with remaining costs estimated to be $3,780,000. 2022 billings were $2,870,000 and $2,595,000 cash was collected. The project was completed in 2023 after additional costs of $3,920,000 were incurred. The company’s fiscal year-end is December 31. Arrow recognizes revenue over time according to 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.
(2) Prepare journal entries for 2021 to record the transactions described

Answer 1

Answer:

% of completion= 33.7% for 2021

% of completion = 55.4% for 2022

% of completion = 100% for 2023

Gross profit/loss  =   $696,770 for 2021

Gross profit/loss =  -$141,660  for 2022

Gross profit/loss = -$400,000  for 2023

Explanation: 

See the table below

Year          Actual cost       Total incurred cost       Total estimated cost

2021        $2,070,000        $2,070,000                  $6,140,000

2022       $2,620,000        $4,690,000                  $8,470,000

2023       $3,920,000        $8,610,000                    $8,610,000

Percentage of completion is calculated using the formula;

% of completion =  Total incurred cost /Total estimated cost *100

For 2021:

% of completion = $2,070,000 /$6,140,000 *100

                           =0.337 *100

                            =33.7%

For 2022:

% of completion = $4,690,000 /$8,470,000 *100

                           =0.554 *100

                           = 55.4%

For 2023:

% of completion = $8,610,000 / $8,610,000 *100

                            =1 * 100

                             = 100%

             

Revenue and Gross profit or loss recognized in 2021, 2022 and 2023

For 2021:                                           Previous year       Recognized in 2021

Price                    $8,210,000  

%completion         33.7%  

Revenue                $2,766,770                    0                     $2,766,770

Expenses                $2,070,000                  0                     $2,070,000

Gross profit/loss     $696,770                                              $696,770

For 2022:                                       Previous year       Recognized in 2022

Price                    $8,210,000  

%completion        55.4%

Revenue              $4,548,340              $2,766,770              $1,781,570        

Expenses             $4,690,000             $2,070,000            $2,620,000            

Gross profit/loss   -$141,660                                             -$838,430

For 2023:                                         Previous year       Recognized in 2023

Price                     $8,210,000  

%completion          100%

Revenue                $8,210,000           $4,548,340        $3661660        

Expenses               $8,610,000           $4,690,000       $3920000

Gross profit/loss = -$400,000                                     -$258340

2. Journal Entries for 2021:

Year General Journal                        Debit                 Credit

2021 Construction in progress      $2,070,000

                Various accounts                                                 $ 2,070,000

          (Construction cost incurred)

          Accounts receivable               $2,570,000

               Billings on construction                                        $2,570,000

                 

               Cash                                   $2,320,000

               Accounts receivable                                 $2,320,000

              Construction in progress           $696,770  

              Cost of construction             $2,070,000

        Revenue from long-term contracts                       $2,766,770