Question

Horner Construction Co. uses the percentage-of-completion method. In 2014, Horner began work on a contract for $16,500,000; it was completed in 2015. The following cost data pertain to this contract:

Year Ended December 31
2014 2015
Cost incurred during the year $5,850,000 $4,200,000
Estimated costs to complete at the end of year 3,900,000 —
The amount of gross profit to be recognized on the income statement for the year ended December 31, 2015 is
a. $2,400,000.
b. $2,580,000.
c. $2,700,000.
d. $6,450,000.

Answer 1

The gross profit to be recognized on the income statement is $1,062,550.

Step-by-step explanation:

The gross profit to be recognized on the income statement for the year ended December 31, 2015 can be calculated using the percentage-of-completion method. The formula for gross profit is (Total Estimated Revenue - Total Estimated Costs) x Percentage Complete. In this case, the total estimated revenue is $16,500,000 and the total estimated costs are $5,850,000 + $4,200,000 + $3,900,000 = $14,950,000. The percentage complete in 2015 can be calculated as follows:

1. Calculate the total costs incurred in 2014 and 2015: $5,850,000 + $4,200,000 = $10,050,000.
2. Calculate the total estimated costs to complete at the end of 2015: $3,900,000.
3. Calculate the total estimated costs: $10,050,000 +$3,900,000 = $13,950,000.
4. Calculate the percentage complete: $10,050,000 / $13,950,000 = 0.719.

Finally, calculate the gross profit: ($16,500,000 - $14,950,000) x 0.719 = $1,062,550. Therefore, the amount of gross profit to be recognized on the income statement for the year ended December 31, 2015 is $1,062,550.