On February 1, 2024, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8.510,000. During 2024, costs of $2.170.000 were incurred with estimated costs of $4.170.000 yet to be incurred Billings of $2.570,000 were sent, and cash collected was $2.420.000 n 2025, costs incurred were $2.670.000 with remaining costs estimated to be $3,855,000 2025 billings were $2.920,000, and $2,645,000 cash was collected. The project was completed in 2026 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 percentage of completion. Required: 1. Calculate the amount of revenue and gross profit or loss to be recognized in each of the three years 2a. Prepare journal entries for 2024 to record the transactions described (credit "Cash, Materials, etc. for construction costs incurred). 2b. Prepare journal entries for 2025 to record the transactions described (credit "Cash, Materials, etc." for construction costs incurred). 3a, Prepare a partial balance sheet to show the presentation of the project as of December 31, 2024 3b. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2025
Answers & Comments
Answer:
1. Calculation of Revenue and Gross Profit or Loss:
Year 2024:
Revenue Recognized = ($2,170,000 / $4,170,000) * $8,510,000 = $4,410,541.32
Gross Profit = Revenue Recognized - Costs Incurred = $4,410,541.32 - $2,170,000 = $2,240,541.32
Year 2025:
Revenue Recognized = ($4,840,000 / $8,025,000) * $8,510,000 = $5,137,154.64
Gross Profit = Revenue Recognized - Costs Incurred = $5,137,154.64 - $2,670,000 = $2,467,154.64
Year 2026:
Revenue Recognized = $8,510,000 - ($4,410,541.32 + $5,137,154.64) = -$37,696.96 (Loss)
Gross Loss = Costs Incurred - Revenue Recognized = $3,970,000 - $37,696.96 = $3,932,303.04 (Loss)
2a. Journal Entries for 2024:
- To record costs incurred:
Debit Construction in Progress: $2,170,000
Credit Cash/Materials, etc.: $2,170,000
- To record billings and cash collected:
Debit Accounts Receivable: $2,570,000
Credit Billings on Construction: $2,570,000
Debit Cash: $2,420,000
Credit Accounts Receivable: $2,420,000
2b. Journal Entries for 2025:
- To record costs incurred:
Debit Construction in Progress: $2,670,000
Credit Cash/Materials, etc.: $2,670,000
- To record billings and cash collected:
Debit Accounts Receivable: $2,920,000
Credit Billings on Construction: $2,920,000
Debit Cash: $2,645,000
Credit Accounts Receivable: $2,645,000
3a. Partial Balance Sheet as of December 31, 2024:
Construction in Progress: $2,170,000
Less: Billings on Construction: $2,570,000
Gross Profit (Asset): $400,000
3b. Partial Balance Sheet as of December 31, 2025:
Construction in Progress: $2,670,000
Less: Billings on Construction: $5,490,000 ($2,570,000 + $2,920,000)
Gross Profit (Liability): -$2,820,000
Please note that the Gross Profit is presented as an asset in 2024 and as a liability in 2025, reflecting the revenue recognition over time. The negative gross profit in 2026 indicates a loss on the project.
Explanation:
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