On February 1, 2020, Sterling Structures Ltd. signed a $3.5 million contract to construct an office and warehouse for a small wholesale company. The project was originally expected to be completed in two years, but difficulties in hiring a sufficient pool of skilled workers extended the completion date by an extra year. As well, significant increases in the price of steel in the second year resulted in cost overruns on the project. Sterling was able to negotiate a partial recovery of these costs, and the total contract value was adjusted to $3.8 million in the second year. Additional information from the project is as follows:

Required:

a. Calculate the amount of gross profit to be recognized each year using the percentageof-
completion method.

b. Prepare all the required journal entries for 2021.

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Total contract value Accumulated costs to date Estimated costs to complete the project Customer billings to date Cash collected to date 2020 $3,500,000 2021 $3,800,000 2022 $3,800,000 800,000 2,400,000 3,900,000 2,100,000 1,600,000 1,000,000 2,100,000 3,800,000 1,000,000 2,000,000 3,800,000