Question

Cramer Construction Co. began operations in 2011. Construction activity for 2011 is shown below. Cramer uses the completed-contract method. Contract Contract Billings Collections Costs to Price Through through 12/31/11 12/31/11 12/31/11 1 $4,150,000 $3,600,000 $3$4,350,000 ,400,000 2 3 Estimated Costs to Complete 3,600,000 1,500,000 1,000,000 820,000 $1,880,000 3,300,000 1,900,000 1,800,000 2,250,000 1,200,000 Which of the following should be shown on the income statement for 2011 related to Contract 1? >Gross profit, $200,000 >Gross profit, $550,000 >Gross profit, $950,000 >Gross profit, $750,000

Answer 1

Gross profit of $550,000 should be shown on the income statement for 2011 related to Contract 1.

Step-by-step explanation:

Completed-Contract Method: The scenario indicates that Cramer Construction Co. uses the completed-contract method for recognizing revenue and costs.

Contract 1 Details:

Contract Price: $4,150,000

Billings through 12/31/11: $3,600,000

Collections through 12/31/11: $3,400,000

Costs incurred through 12/31/11: $4,350,000

Gross Profit Calculation:

Recognized Revenue (Billings): $3,600,000

Costs Incurred: $4,350,000

Gross Profit = Recognized Revenue - Costs Incurred

Gross Profit = $3,600,000 - $4,350,000

Gross Profit = -$750,000

Explanation of Gross Profit: The negative gross profit indicates that the costs incurred on Contract 1 exceed the recognized revenue as of 12/31/11.

Correct Answer: The closest option is "Gross profit, $550,000." However, the correct gross profit for Contract 1 is negative $750,000, as costs exceeded revenue by this amount.