Question

A project begins in January 2014; it is to be completed in October 2016. The contract price is $3,900 and the estimated total cost of the project is $3,000. Additional data for the project is provided below:

2014 2015 2016
Costs Incurred To Date $300 $2,400 $4,200
Estimated cost to Complete 2,700 1,600
Estimated Total Cost $3,000 $4,000 $4,200

Percentage of completion [PC]= (Costs incurred to date)/(Estimated total cost)

Required:
Compute the gross profit/loss recognized for each year under the PC method.

Answer 1

Particulars 2014 2015 2016

Contract Price A 3,900 3,900 3,900

Cost Incurred to date B 300 2,400 4,200

Cost Incurred during the year C 300 2,100 2,100

Estimated total cost E 3,000 4,000 4,200

Percentage complete 10% 60% 100%

Revenue to be recognized G 390 1,950 1,560

Gross Profit/(Loss) H=G-C 90 (150) (540)

Notes

Percentage Complete = Cost Incurred to date / Estimated cost to complete

Gross Profit calculation:

Gross Profit = (Contract Price*Percentage complete) - Revenue previously recognized

Year 2014

10% completed

Revenue recognized = 10% * $ 3,900 = $390.

Year 2015

60% completed

Revenue recognized = 60% * $ 3,900 - $390 (previously recognized) = $1,950.

Year 2016

100% completed.

Revenue recognized = 100% x $3,900 - $390 - $1,950 (previously recognized) = $1,560.