Question

Red Builders agrees to construct a new building for Blue Co. for a total contract price of $6,000,000. The estimated construction costs at inception was $4,000,000. The construction project was completed after two years. Below are the actual costs for years 1 and 2: DescriptionCumulative Year 1Year 2Cost incurred to date1,200,0002,500,000Estimated additional costs to complete3,600,0002,100,000Billings1,050,0002,300,000Cash Collections1,000,0001,900,000 Red has determined that this contract qualifies for revenue recognition over time (as opposed to upon completion). As a result, Red Builders should have recognized profit at the end of year 1 in the amount of:

Answer 1

Answer: $300,000

Step-by-step explanation:

Total expected costs = cost incurred to date + estimated cost to complete

= 1,200,000 + 3,600,000

= 4,800,000

`Percentage of completion=(Cost\ incurred\ to\ date)/(Total\ expected\ cost)* 100`

`Percentage of completion=(1,200,000)/(4,800,000)* 100`

= 0.25

= 25%

Profit = contract revenue - Total expected costs

= $6,000,000 - 4,800,000

= $1,200,000

Cumulative gross profit = Profit × Percentage of completion

= $1,200,000 × 0.25

= $300,000

Therefore, Red Builders should have recognized profit at the end of year 1 in the amount of $300,000.