Question

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,650,000. The project began in 2021 and was completed in 2022. Data relating to the contract are summarized below:

2021 2022
Costs incurred during the year $ 352,000 $ 2,025,000
Estimated costs to complete as of 12/31 1,408,000 0
Billings during the year 470,000 1,750,000
Cash collections during the year 405,000 1,815,000

Required:
1. Compute the amount of revenue and gross profit or loss to be recognized in 2021 and 2022 assuming Nortel recognizes revenue over time according to percentage of completion.
2. Compute the amount of revenue and gross profit or loss to be recognized in 2021 and 2022 assuming this project does not qualify for revenue recognition over time.
3. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2021 assuming Nortel recognizes revenue over time according to percentage of completion.
4. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2021 assuming this project does not qualify for revenue recognition over time.

Answer 1

Multiple Answers

Step-by-step explanation:

1. Over Time

a) Begin w/ Percentage of Revenue Method:

Actual Costs to Date / Estimated Total Costs = % Complete to Date

2021:

$352,000 / ($352,000 + $1,408,000) =

$352,000 / $1,760,000 = 20%

2022:

($352,000 + $2,025,000) / ($352,000 + $2,025,000)

$2,377,000 / $2,377,000 = 100%

b)

2021:

Construction Revenue: (20% * $2,650,000) = $530,000

Less: Construction Expenses: $352,000

Gross Profit: $178,000

c)

2022 (subtract out 2021 costs):

Construction Revenue: $2,650,000 - $530,000 = $2,120,000

Less: Construction Expenses: $2,377,000 - $352,000 = $2,025,000

Gross Profit: $273,000 - $178,000 = $95,000

2. Upon Completion:

2021:

Revenue: $0

Gross Profit: $0

2022:

Revenue: $2,650,000

Gross Profit: $273,000

3. Over Time:

Current Assets:

A/R: $470,000 - $405,000 = $65,000

Costs & Profits in Excess of Billings: $530,000 - $470,000 = $60,000

4. Upon Completion:

Current Assets:

A/R: $470,000 - $405,000 = $65,000

Current Liabilities:

Billings in Excess of Profit & Cash: $470,000 - $352,000 = $118,000