On February 1 2018 Arrow Construction Company entered into a

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,450,000. During 2018, costs of $2,150,000 were incurred with estimated costs of $4,150,000 yet to be incurred. Billings of $2,650,000 were sent, and cash collected was $2,400,000. In 2019, costs incurred were $2,650,000 with remaining costs estimated to be $3,825,000. 2019 billings were $2,900,000 and $2,625,000 cash was collected. The project was completed in 2020 after additional costs of $3,950,000 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.

Solution

Percentage completion method 2018 2019 2020 Cost incurred in till previous year 0 2150000 4800000 ADD Cost incurred during the year 2150000 2650000 3950000 Total cost incurred till date 2150000 4800000 8750000 ADD Estimated cost to be incurred 4150000 3825000 0 Total estimated cost to be incurred 6300000 8625000 8750000 Percentage of completion (A) 34% 55.65% 100% (cost incurred till date /total estimated cost ) Total revenue (B) 8450000 8450000 8450000 Total revenue recognized (A *B) 2883730 4702609 8450000 Less Revenue recognized in previous year 0 2883730 4702609 revenue recognized in current year 2883730 1818879 3747391 2018 2019 2020 Revenue 2883730 1818879 3747391 Less Cost incurred 2150000 2650000 3950000 Gross profit 733730 -831121 -202609 2018 1 Construction in progress 2150000                Accounts payable 2150000 2 Contracts receivable 2650000                Progress billings 2650000 3 Construction in progress 733730 Construction expense 2150000                Construction revenue 2883730 4 Cash 2400000           Contract receivable 2400000 2019 1 Construction in progress 2650000                Accounts payable 2650000 2 Contracts receivable 2900000                Progress billings 2900000 3 Construction expense 2650000 Construction in progress -831121                Construction revenue 1818879 4 Cash 2625000           Contract receivable 2625000 Partial balance sheet Asset 2018 2019 Contract receivable 250000 525000 Cash 2400000 5025000 Net contruction in progress 2883730 5533730 Liabilities Accounts payable 2150000 4800000