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Arizona Desert Homes (ADH) constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below: Contract amount $ 3,000,000 Cost: 2020 1,200,000 2021 600,000 Gross profit: 2020 800,000 2021 400,000 Contract billings: 2020 1,500,000 2021 1,500,000 ADH recognizes revenue over time with respect to these contracts. In its December 31, 2020, balance sheet, ADH would report:

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For 2020, the journal entry of Arizona Desert Homes (ADH) to record revenue is as follows:

2020:

Debit Accounts Receivable $2,010,000 ($3,000,000 x 67%)

Credit Construction Revenue $2,010,000

  • To record the revenue for 2020 based on the percentage of completion.

What is the percentage of completion method?

The percentage of completion method is used to recognize revenue for a long-term contract by computing the percentage of completion for each period based on the costs to completion.

The method is used when ADH recognizes revenue over time instead of at the end of the contract (or contract completion).

Revenue is recognized over time if:

  • Economic benefits of the provided asset are consumed by the customer as the entity performs.
  • The entity's performance creates or enhances an asset controlled by the customer as the asset is created or enhanced.

Data and Calculations:

              Contract amount         Cost:           Gross profit:   Contract billings:

2020           $3,000,000       $1,200,000   $800,000       $1,500,000

2021                                 600,000         400,000         1,500,000

Percentage of completion:

2020 = 67% ($1,200,000/$1,800,000 x 100)

2021 = 33% ($600,000/$1,800,000 x 100)

Learn more about revenue recognition at https://brainly.com/question/26275324

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