In early 2018, Skyline Corp. won a contract to build a rapid transit line along the Broadway corridor. The contract was for $1.9 billion to be received over the construction period of six years, ending in November 2024. Skyline has a December 31 year-end and uses the percentage of completion method to account for long-term contracts. 

Required:

a. Skyline’s management expects the gross margin on the total project to be 20%, and that $228 million would be incurred on the project by December 31, 2018.

i. How much gross profit (or loss) will Skyline record in the 2018 fiscal year if management’s estimates are accurate?

ii. Provide the journal entries to record revenue, cost of goods sold, and expected loss (if applicable) for fiscal 2018. 

b. Assume that it is now early 2022 and you are preparing the adjusting entries for 2021. The accounting records indicate that, by the end of 2020, a total of $760 million in revenue and $684 million in cost of goods sold had been recorded. You also know that $380 million in costs were incurred on the project in 2021, and management’s best estimates indicate another $912 million in costs will be required to complete the project.

i. How much gross profit (or loss) should Skyline record in the 2021 fiscal year if management’s estimates are accurate?

ii. Provide the journal entries to record revenue, cost of goods sold, and expected loss (if applicable) for fiscal year 2021.