Question

A construction company entered into a fixed-price contract to build an office building for $46 million. Construction costs incurred during the first year were $12 million and estimated costs to complete at the end of the year were $28 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

Total revenue: $46 million

First year costs: $12 million

Estimated first year costs(EFYC): $28 million

Cost to date for the projec (CTD): $12 million

Given this information, the first thing to do is to calculate the percentage % of completion. The formula is stated below.

Percentage of completion ( CTD / EFYC )

CTD / TEC = (12000000/28000000)

CTD / TEC = (42,85%)

Then multiply the Percentage of completion * Total Revenue

42.85%*46.000.000 to obtain the revenue for period 2.

The loss that the company must present in their statements for year 1 is: Loss for period 1 =$12.000.000

Answer 2

Revenue in the first year will be $13.8million

Gross Profit is $1.8million

Explanation:

Amount entered into the fixed price contract = Total revenue = $46million

Construction Costs incurred in first year = $12million

Estimated Costs to complete at the end of the year = $28million

Now,

Using the percentage of composition method

Total costs= incurred costs+ estimated costs to complete the work

= $12million + $28million

= $40million

Revenue to recognise = (Incurred Costs/ Total costs)
`*`Total Revenue

= ($12million/$40million)
`*` $46million

= $13.8million

Hence, Construction costs = $12million

Total Revenue = $13.8million

Gross Profit = Total Revenue – Construction Costs

= $13.8million - $12million

= $1.8million

Therefore, the total revenue in the first year of contract will be $13.8million and the gross profit will be $1.8million