Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,250,000. The project began in 2021 and was completed in 2022. Data relating to the contract are summarized below: 2018 2019
Costs incurred during the year $300,000 $1575,000
Estimated costs to complete as of 12/31 1,200,000 0
Billings during the year 380,000 1,620,000
Cash collections during the year 250,000 1,750,000

Required:
a. Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 assuming Nortel recognizes revenue over time according to percentage of completion.
b. Compute the amount of revenue and gross profit or loss to be recognized in 2018 and 2019 assuming this project does not qualify for revenue recognition over time.
c. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2018 assuming Nortel recognizes revenue over time according to percentage of completion.
d. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2018 assuming this project does not qualify for revenue recognition over time.

Nortel Networks

Revenue Recognized over time according to percentage of completion:

2018:

Percentage of completion = 20%

Revenue =      $450,000 ($2,250,000 * 20%)

Costs incurred 300,000

Gross profit = $150,000

2019:

Percentage of completion = 80% (100% - 20%)

Revenue =        $1,800,000

Costs incurred   1,575,000

Gross profit =    $225,000

b.

2018:

Revenue =           $0

Costs incurred = $300,000

Gross loss =        $300,000

2019:

Revenue =      $2,250,000

Costs incurred  1,575,000

Gross profit =    $675,000

c. Partial balance sheet (Revenue over time according to percentage of completion):

Assets:

                                         2018

Accounts receivable $130,000

Equity:

Retained earnings   $150,000

d. Partial balance sheet, assuming this project does not qualify for revenue recognition over time:

Assets:

                                         2018

Accounts receivable $130,000

Equity:

Retained earnings  ($300,000)

Explanation:

a) Data and Calculations:

Contract price = $2,250,000

                                                                       2018         2019

Costs incurred during the year                $300,000   $1575,000

Estimated costs to complete as of 12/31 1,200,000   0

Billings during the year                               380,000   1,620,000

Cash collections during the year               250,000   1,750,000

Accounts Receivable:

                                            2018         2019

Beginning balance       $0                 $130,000

Billings                            380,000    1,620,000

Cash collection             (250,000)   1,750,000

Ending balance            $130,000    $0

c. Partial balance sheet (Revenue over time according to percentage of completion):

Assets:

                                         2018         2019

Accounts receivable $130,000        $0

Equity:

Retained earnings   $150,000     $225,000

d. Partial balance sheet, assuming this project does not qualify for revenue recognition over time:

Assets:

                                         2018         2019

Accounts receivable $130,000        $0

Equity:

Retained earnings  ($300,000)     $675,000

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the correct answer is - no.

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