Question

A construction company entered into a fixed-price contract to build an office building for $16 million. Construction costs incurred during the first year were $3 million and estimated costs to complete at the end of the year were $7 million. During the first year the company billed its customer $3 million, of which $1 million was collected before year-end. What would appear in the year-end balance sheet related to this contract using the percentage-of-completion method

Answer 1

Under the percentage-of-completion method, the year-end balance sheet would show $1 million in net profit related to this contract.

Step-by-step explanation:

Using the percentage-of-completion method, we recognize revenue and expenses as we make progress on the construction project.

To determine what would appear in the year-end balance sheet, we need to calculate the percentage of completion.

First, we calculate the total estimated costs of the project, which are $3 million incurred during the first year plus $7 million estimated costs to complete, resulting in a total of $10 million.

Next, we calculate the percentage of completion by dividing the costs incurred during the first year by the total estimated costs: $3 million / $10 million = 30%.

Based on the percentage of completion, we can determine the revenue to be recognized. The total contract price is $16 million, so 30% of that is $4.8 million.

The expenses incurred during the first year were $3 million, so the gross profit is $4.8 million - $3 million = $1.8 million.

However, since only $1 million was collected before year-end, the net profit recognized on the balance sheet would be $1 million.

Therefore, under the percentage-of-completion method, the year-end balance sheet would show $1 million in net profit related to this contract.