Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,550,000. The project began in 2016 and was completed in 2017. Data relating to the contract are summarized below:

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,550,000. The project began in 2016 and was completed in 2017. Data relating to the contract are summarized below:

		2016			2017
Costs incurred during the year	$	344,000		$	1,960,000
Estimated costs to complete as of 12/31		1,376,000			0
Billings during the year		456,000			1,730,000
Cash collections during the year		272,000			1,805,000

Required:

1.	Compute the amount of revenue and gross profit or loss to be recognized in 2016 and 2017 assuming Nortel recognizes revenue over time according to percentage of completion.

Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2016 assuming Nortel recognizes revenue over time according to percentage of completion.
 

Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2016 assuming this project does not qualify for revenue recognition over time.

 

Explanation

1.

	2016			2017
Contract price	$	2,550,000		$	2,550,000
Actual costs to date		344,000			2,304,000
Estimated costs to complete		1,376,000			- 0 -
Total estimated costs		1,720,000			2,304,000
Gross profit (estimated in 2016)	$	830,000		$	246,000

Revenue recognition:

2016:	$344,000	= 20% × $2,550,000 = $510,000
	$1,720,000

2017: $2,550,000 – 510,000 = $2,040,000

Gross profit recognition:

2016: $510,000 – 344,000 = $166,000

2017: $2,040,000 – 1,960,000 = $80,000

Note: We also can calculate gross profit directly using the percentage of completion:

2016:	$344,000	= 20% × $830,000 = $166,000
	$1,720,000

2017: $246,000 – 166,000 = $80,000

2.

2016: $0 (contract not yet completed)

2017: $ 2,550,000 – 2,304,000 = $246,000

3.

$510,000 = Costs ($344,000) + profit ($166,000)

4.

Billings ($456,000) in excess of costs ($344,000)

Thank you!