Question

The following data relates to a construction job started by Syl Co. during 2016:

Total contract price $100,000
Actual costs incurred during 2016 20,000
Estimated remaining costs 40,000
Billed to customer during 2016 30,000
Received from customer during 2016 10,000
Assuming that Syl recognizes revenue over time according to percentage of completion, how much should Syl recognize as gross profit for 2016?
a) $26,667
b) $0
c) $13,333
d) $33,333

Answer 1

To determine the gross profit recognized by Syl Co. for 2016 using the percentage of completion method, we find that the gross profit is $13,333 calculated by taking the percentage of work completed (33.33% of the total contract) and subtracting the actual costs incurred. c) $13,333

Step-by-step explanation:

The student is asking about revenue recognition using the percentage of completion method. To calculate the gross profit Syl Co. should recognize for the year 2016, we start by determining the percentage of the work completed. This is done by adding the actual costs incurred to the estimated remaining costs, giving us the total estimated costs, and then dividing the actual costs incurred by the total estimated costs.

Total estimated costs = Actual costs incurred during 2016 + Estimated remaining costs = $20,000 + $40,000 = $60,000

Percentage of completion = Actual costs incurred during 2016 / Total estimated costs = $20,000 / $60,000 = 1/3 or 33.33%

The revenue Syl Co. should recognize is then the contract price times the completion percentage: $100,000 x 33.33% = $33,333

From this revenue, we subtract the actual costs incurred to find the gross profit: Gross profit = Recognized revenue - Actual costs incurred = $33,333 - $20,000 = $13,333

So the answer is c) $13,333.