Question:
[This is a variation of Exercise 5–13 focusing on the completed contract method.]
On February 1, 2013, Arrow Construction Company entered into a three-year construction contract to
build a bridge for a price of $8,000,000. During 2013, 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 2014, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2014 billings
were
$2,750,000 and $2,475,000 cash was collected. The project was completed in 2015 after additional costs
of $3,800,000 were incurred. The company’s fiscal year-end is December 31. Arrow uses the completed
contract method.
Required:
1. Calculate the amount of gross profit or loss to be recognized in each of the three years.
2. Prepare journal entries for 2013 and 2014 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, 2013 and
2014.
Answer:
Requirement 1
Year Gross profit (loss) recognized
2013 -0-
2014 $(100,000)
2015 (200,000)
[This is a variation of Exercise 5–13 focusing on the completed contract method.]
On February 1, 2013, Arrow Construction Company entered into a three-year construction contract to
build a bridge for a price of $8,000,000. During 2013, 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 2014, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2014 billings
were
$2,750,000 and $2,475,000 cash was collected. The project was completed in 2015 after additional costs
of $3,800,000 were incurred. The company’s fiscal year-end is December 31. Arrow uses the completed
contract method.
Required:
1. Calculate the amount of gross profit or loss to be recognized in each of the three years.
2. Prepare journal entries for 2013 and 2014 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, 2013 and
2014.
Answer:
Requirement 1
Year Gross profit (loss) recognized
2013 -0-
2014 $(100,000)
2015 (200,000)
