On February 1, 2018, Arrow Construction Company entered into a three-year constr

Question

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,120,000. During 2018, costs of $2,040,000 were incurred with estimated costs of $4,040,000 yet to be incurred. Billings of $2,540,000 were sent, and cash collected was $2,290,000.

In 2019, costs incurred were $2,540,000 with remaining costs estimated to be $3,660,000. 2019 billings were $2,790,000 and $2,515,000 cash was collected. The project was completed in 2020 after additional costs of $3,840,000 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 2018, 2019, and 2020 using the percentage of completion method?
2a. Prepare journal entries for 2018 to record the transactions described (credit "various accounts" for construction costs incurred).
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.

Explanation / Answer

Answer 1. Percentage of Completion Method 2018 2019 2020 Cost Incurred each year (A)          2,040,000          2,540,000          3,840,000 Cost Incurred to date (B)          2,040,000          4,580,000          8,420,000 Estimated Costs ©          4,040,000          3,660,000                         -   Total Estimated Costs (D = B + C)          6,080,000          8,240,000          8,420,000 % Completed (E = B / D) 33.55% 55.58% 100.00% Revenue          2,724,474          1,788,827          3,606,699 Expenses          2,040,000          2,540,000          3,840,000 Gross Profit              684,474           (751,173)           (233,301) Answer 2-a & b. - Percentage of Completion Journal Entry Date Particulars Dr. Amt Cr. Amt. 2018 1 Construction In Progress                Dr.          2,040,000    To Cash          2,040,000 2 Accounts Receivable                        Dr.          2,540,000    To Billings on Contract          2,540,000 3 Cash                                                         Dr.          2,290,000    To Accounts Receivable          2,290,000 4 Construction In Progress                Dr.              684,474 Construction Expense                     Dr.          2,040,000     To Construction Revenue          2,724,474 2019 1 Construction In Progress                Dr.          2,540,000    To Cash          2,540,000 2 Accounts Receivable                        Dr.          2,790,000    To Billings on Contract          2,790,000 3 Cash                                                         Dr.          2,515,000    To Accounts Receivable          2,515,000 4 Construction Expense                     Dr.          2,540,000     To Construction Revenue          1,788,827     To Construction in Progress              751,173 Answer 3-a & b. - Percentage of Completion Balance Sheet (Partial) 2018 2019 Current Assets Accounts Receivable    250,000    525,000 Cost of Profit > Billings    684,474 Current Liabilities Billings > Cost of Profit      66,699

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