Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,000,000. The project began in 2021 and was completed in 2022. Data relating to the contract are summarized below: 2016:
Cost incurred during the year: $300,000
Estimated costs to complete as of 12/31 1,200,000
Billings during the year 380,000
Cash collections during the year 250,000
2017:
Costs incurred during the year $1,575,000
Estimated costs to complete as of 12/31 -0-
Billings during the year $1,620,000
Cash collections during the year $1,750,000
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.
2. Compute the amount of revenue and gross profit or loss to be recognized in 2016 and 2017 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 2016 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 2016 assuming this project does not qualify for revenue recognition over time.

Nortel Networks

1. Computation of revenue and gross profit or loss in 2016 and 2017, assuming Nortel recognizes revenue over time according to percentage of completion:

a. Revenue to be recognized in 2016 under percentage of completion:

Cost incurred/Cost incurred + Estimated cost to completion x $2,000,000

= $300,000/$1,875,000 x $2,000,000

= $320,000

b. Gross profit:

Revenue =         $320,000

Costs incurred = 300,000

Gross profit        $20,000

c.. Revenue to be recognized in 2017 under percentage of completion:

Cost incurred/Cost incurred + Estimated cost to completion x $2,000,000

= $1,575,000/$1,875,000 x $2,000,000

= $1,680,000

d. Gross profit:

Revenue =         $1,680,000

Costs incurred =  1,575,000

Gross profit        $105,000

2. Computation of revenue and gross profit or loss in 2016 and 2017, assuming project does not qualify for revenue recognition over time:

2016 Revenue = Cost plus Profit margin

= $300,000 x 1.1

= $330,000

2017 Revenue = Total Revenue minus 2016 Revenue

= $2,000,000 - $330,000

= $1,670,000

3. Nortel Networks' Partial Balance Sheet for year ended December 31, 2016, under recognizing revenue over time according to percentage of completion:

Current Assets:

Accounts Receivable $130,000

Cash                          $250,000

Current Liabilities:

Deferred Revenue     $60,000

4. Nortel Networks' Partial Balance Sheet for year ended December 31, 2016, under revenue not qualifying for recognition over time:

Current Assets:

Accounts Receivable $130,000

Cash                          $250,000

Current Liabilities:

Deferred Revenue     $50,000

Explanation:

a) Data and Calculations:

Contract sum = $2,000,000

2016:

Cost incurred during the year: $300,000

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

Billings during the year 380,000

Cash collections during the year 250,000

2016 Accounts Receivable:

Billings during the year =                $380,000

Cash collections during the year = (250,000)

Balance b/d                                      $130,000

2016 Deferred Revenue:

Revenue during the year = $320,000

Billings under the year =       380,000

Deferred Revenue                $60,000

2017:

Costs incurred during the year $1,575,000

Estimated costs to complete as of 12/31 -0-

Billings during the year $1,620,000

Cash collections during the year $1,750,000

2017 Accounts Receivable:

Balance b/d                                        $130,000

Billings during the year                    1,620,000

Cash collections during the year   (1,750,000)

Balance b/d                                        $0

Point in Time Revenue Recognition:

Revenue = Costs incurred + estimated profit margin

Estimated Profit margin = Profit margin = $2,000,000 - ($300,000 + $1,500,000)

= $200,000

Profit margin ratio = $200,000/$2,000,000 x 1`00 = 10%

2016 Accounts Receivable:

Billings during the year =                $380,000

Cash collections during the year = (250,000)

Balance b/d                                      $130,000

2016 Deferred Revenue:

Recognized revenue during the year = $330,000

Billings under the year =                           380,000

Deferred Revenue                                    $50,000

2017 Accounts Receivable:

Balance b/d                                             $130,000

Billings during the year                         1,620,000

Cash collections during the year        (1,750,000)

Balance b/d                                            $0