Question

A construction company entered into a fixed-price contract to build an office building for $32 million. Construction costs incurred during the first year were $9 million and estimated costs to complete at the end of the year were $21 million. The company recognizes revenue over time according to percentage of completion. How much revenue and gross profit or loss will appear in the company’s income statement in the first year of the contract? (Enter your answer in whole dollars.)

Answer 1

In the first year of the contract, the construction company will recognize $9.6 million in revenue and a gross profit of $0.6 million.

Step-by-step explanation:

In the first year of the contract, the construction company has recognized cost of $9 million and estimated costs to complete at the end of the year of $21 million. To calculate the revenue and gross profit or loss, we need to determine the percentage of completion of the project. The percentage of completion is calculated by taking the costs incurred in the first year divided by the total estimated costs.

Percentage of completion = ($9 million) / ($9 million + $21 million) = 0.3 or 30%

Revenue recognized = Percentage of completion * Total contract price = 0.3 * $32 million = $9.6 million

Gross profit or loss = Revenue recognized - Costs incurred = $9.6 million - $9 million = $0.6 million

Answer 2

company gained a gross profit of $2 million

Step-by-step explanation:

Data provided in the question;

Contract price to build an office = $32 million

Construction costs incurred during the first year = $9 million

Estimated costs to complete at the end of the year = $21 million

Therefore,

Total cost incurred to complete the construction of the office at the end of the first year

= Construction costs incurred during the first year + Estimated costs to complete at the end of the year

= $9 million + $21 million

= $30 million

Thus,

The revenue generated by the company = Contract price - cost incurred

= $32 million - $30 million

= $2 million

since the revenue is positive, hence the company gained a gross profit of $2 million