Chapter 5, Problem 5.20E

Long-term contract; revenue recognition upon project completion; loss projected on entire project

• LO5–8, LO5–9

[This is a variation of E 5–19 focusing on the revenue recognition upon project completion.]

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2018, costs of $2,000,000 were incurred, with estimated costs of $4,000,000 yet to be incurred. Billings of $2,500,000 were sent, and cash collected was $2,250,000.

In 2019, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2019 billings were $2,750,000, and $2,475,000 cash was collected. The project was completed in 2020 after additional costs of $3,800,000 were incurred. The company’s fiscal year-end is December 31. This project does not qualify for revenue recognition over time.

Required:

1. Calculate the amount of gross profit or loss to be recognized in each of the three years.

2. Prepare journal entries for 2018 and 2019 to record the transactions described (credit “various accounts” for construction costs incurred).

3. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2018 and 2019. Indicate whether any of the amounts shown are contract assets or contract liabilities.