Assume Nortel Networks contracted to provide a customer with

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,450,000. The project began in 2018 and was completed in 2019. Data relating to the contract are summarized below: 2018 2019 Costs incurred during the year $ 336,000 $ 1,870,000 Estimated costs to complete as of 12/31 1,344,000 0 Billings during the year 446,000 1,710,000 Cash collections during the year 268,000 1,795,000 Required: 1. Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 assuming Nortel recognizes revenue over time according to percentage of completion. 2. Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 assuming this project does not qualify for revenue recognition over time. 3. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2018 assuming Nortel recognizes revenue over time according to percentage of completion. 4. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2018 assuming this project does not qualify for revenue recognition over time.

Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 assuming Nortel recognizes revenue over time according to percentage of completion

Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 assuming this project does not qualify for revenue recognition over time.

Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2018 assuming Nortel recognizes revenue over time according to percentage of completion.

Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2018 assuming this project does not qualify for revenue recognition over time.

Solution

1 2018 2019 Contract price (1) 2450000 2450000 Actual cost to date (a) 336000 2206000 (336000+1870000) Estimated cost to complete (b) 1344000 0 Total estimated cost ©=(a)+(b) 1680000 2206000 Percentage of completion (a)/© 20% 100% Expected gross profit (1)-© 770000 244000 Revenue to be recognized=(Contract price*Percentage of completion)-Revenue recognized earlier Gross profit to be recognized=(Expected gross profit*Percentage of completion)-Gross profit already recognized 2018 Revenue to be recognized=(2450000*20%)-0=$ 490000 Gross profit to be recognized=(770000*20%)-0=$ 154000 2019 Revenue to be recognized=(2450000*100%)-490000=$ 1960000 Gross profit to be recognized=(244000*100%)-154000=$ 90000 2 If the project does not qualify for revenue recognition over time,recognize revenue on completion of contract 2018 Revenue to be recognized=0 Gross profit to be recognized=0 (Since contract has not completed) 2019 Revenue to be recognized=Contract price=$ 2450000 Gross profit to be recognized=Contract price-Actual cost to date=2450000-2206000=$ 244000 3 Partial balance sheet-2018 Current assets: Accounts receivable Billings made during the year 446000 Less: Cash collections 268000 178000 Cost and profit in excess of billings Cost incurred 336000 Add:Gross profit recognized 154000 490000 Less: Billings 446000 44000 4 Partial balance sheet-2018 Current assets: Accounts receivable Billings made during the year 446000 Less: Cash collections 268000 178000 Current liability: Billings in excess of cost Billings made during the year 446000 Less: Cost incurred 336000 110000