Question

Reedy Builders, Inc. is using the completed-contract method for a $12,500,000 contract that will take three years to complete. Data at December 31, 2015, the end of the first year, are as follows:

Costs incurred to date $6,240,000
Estimated costs to complete $6,660,000
Billings to date $5,920,000
Collections to date $5,540,000
The gross profit or loss that should be recognized for 2015 is:

a. $320,000 loss.
b. $0.
c. $400,000 loss.
d. $133,334 loss

Answer 1

Under the completed-contract method, Reedy Builders would recognize a gross profit or loss of $0 for the year 2015 because the contract is not completed, and revenue and profit recognition is deferred until completion.

Step-by-step explanation:

The gross profit or loss to be recognized by Reedy Builders, Inc. for 2015 under the completed-contract method would be $0 since this accounting method recognizes revenues and gross profit only when a contract is substantially complete. At the end of the first year, the contract in question is not yet completed, and therefore no gross profit or loss should be recognized.