Question

Remington Construction Company uses the percentage-of-completion method. During 2014, the company entered into a fixed-price contract to construct a building for Sherman Company for $24,000,000. The following details pertain to the contract:

December 31, 2014
Dec. 31,2015
Percentage of completion 25% 60%
Estimated total cost of contract $18,000,000
$20,000,000
Gross profit recognized to date 1,500,000
2,400,000
The amount of construction costs incurred during 2015 was

a. $2,000,000.

b. $12,000,000.

c. $7,500,000.

d. $4,500,000.

Answer 1

The construction costs incurred by Remington Construction Company during 2015 were $7,500,000, calculated by taking the 60% of the revised total estimated cost of $20,000,000 and subtracting the costs incurred by the end of 2014.

Step-by-step explanation:

The student is asking how to calculate the construction costs incurred during 2015 using the percentage-of-completion method for accounting in construction contracts. To calculate this, you'll first need to determine the total costs incurred up to the end of 2015 and then subtract the costs that had been incurred by the end of 2014.

We know that as of December 31, 2015, the company estimated the total cost of the contract to be $20,000,000 and the work completed represented 60% of the total contract. By December 31, 2014, 25% of the contract had been completed, and the estimated total cost at that time was $18,000,000.

The costs incurred by the end of 2014 were 25% of $18,000,000, which equals $4,500,000. By the end of 2015, the costs incurred were 60% of $20,000,000, which is $12,000,000. Therefore, the costs incurred during 2015 are:

$12,000,000 (total costs by 2015's end) - $4,500,000 (costs already incurred by 2014's end) = $7,500,000.