Final answer:
For the year 2021, Nortel Networks should recognize $490,000 in revenue and a gross profit of $154,000. In 2022, the company should recognize $1,960,000 in revenue, resulting in a gross profit of $90,000. These figures are based on the percentage of completion method.
Step-by-step explanation:
To calculate the revenue and gross profit or loss recognized in 2021 and 2022 under the percentage of completion method, we need to follow these steps:
- Compute the percentage of completion each year by dividing the costs incurred during the year by the total estimated costs.
- Use the percentage of completion to determine the revenue to be recognized each year.
- Subtract the costs incurred during the year from the recognized revenue to find the gross profit or loss for that year.
For 2021:
- Costs incurred: $336,000.
- Estimated total costs: $336,000 + $1,344,000 = $1,680,000
- Percentage completed in 2021: $336,000 / $1,680,000 = 20%
- Revenue recognized in 2021: 20% of $2,450,000 = $490,000
- Gross profit in 2021: Revenue recognized - costs incurred = $490,000 - $336,000 = $154,000
For 2022:
- Total costs incurred by the end of 2022: $336,000 + $1,870,000 = $2,206,000
- Percentage completed by the end of 2022: $2,206,000 / $2,206,000 = 100%
- Total revenue to be recognized by the end of 2022: $2,450,000.
- Revenue recognized in 2022: $2,450,000 - revenue recognized in 2021 ($490,000) = $1,960,000
- Gross profit in 2022: Revenue recognized in 2022 - costs incurred in 2022 = $1,960,000 - $1,870,000 = $90,000