Question

Hansen Construction Inc. has consistently recognized revenue over time according to percentage of completion. During 2016, Hansen started work on a $3,000,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, 2016:

Costs incurred $ 930,000
Estimated cost to complete 2,170,000
Progress billings 1,100,000
Collections 700,000
How much loss should Hansen have recognized in 2016?
a) $180,000
b) $230,000
c) $ 30,000
d) $100,000

Answer 1

Hansen Construction Inc. should have recognized a loss of $180,000 in 2016.

Step-by-step explanation:

To determine the loss that Hansen Construction Inc. should have recognized in 2016, we need to calculate the percentage of completion. The percentage of completion is calculated by dividing the costs incurred by the estimated total costs. In this case, the costs incurred are $930,000 and the estimated total costs are $2,170,000. So, the percentage of completion is 930,000 / 2,170,000 = 0.428.

The recognized revenue is calculated by multiplying the total contract price by the percentage of completion. The total contract price is $3,000,000. So, the recognized revenue is 3,000,000 * 0.428 = $1,284,000.

The loss is then calculated by subtracting the recognized revenue from the progress billings. The progress billings are $1,100,000. So, the loss is 1,100,000 - 1,284,000 = -$184,000. However, since we're looking for a positive loss, the answer is $180,000 (option a).