Question

Roebling Construction signed a $24 million contract on August 1, 2015, with the city of Candu to construct a bridge over the Vine River. Roebling's estimated cost of the bridge on that date was $18 million. The bridge was to be completed by April 2018. Roebling recognizes revenue over time according to percentage of completion. Roebling's fiscal year ends May 31. Data regarding the bridge contract are presented in the schedule below.

At May 31 ($000 omitted)
2016/2017
Actual costs to date
$ 6,000/$15,000
Estimated costs to complete
12,000/5,000
Progress billings to date
5,000
14,000
Cash collected to date
4,000
12,000
The gross profit or loss recognized in the fiscal year ended May 31, 2016, from this bridge contract is
a) $6,000,000 gross profit.
b) $2,000,000 gross profit.
c) $3,000,000 gross profit.
d) $1,000,000 gross profit.

Answer 1

The gross profit recognized by Roebling Construction for the bridge contract in the fiscal year ended May 31, 2016, is $2,000,000 by using the percentage of completion method.

Step-by-step explanation:

The question is asking to calculate the gross profit recognized by Roebling Construction in the fiscal year ended May 31, 2016, for a bridge construction contract. Gross profit on a contract can be calculated using the percentage of completion method, which recognizes revenue based on the progress of the construction.

First, we determine the percentage of completion by dividing the actual costs to date by the sum of actual costs to date plus estimated costs to complete. For 2016, the actual costs to date were $6,000,000, and the estimated costs to complete were $12,000,000, giving us a completion percentage of 6,000,000 / (6,000,000 + 12,000,000) which is 1/3, or approximately 33.33%.

Next, we calculate the total estimated revenue using the contract amount, which is $24,000,000. By May 31, 2016, 33.33% of this contract is complete, so Roebling Construction would recognize 33.33% of $24,000,000, which is $8,000,000 in revenue. The gross profit is then the recognized revenue minus the actual costs incurred to date. Therefore, $8,000,000 (recognized revenue) - $6,000,000 (actual costs to date) equals a gross profit of $2,000,000.

Thus, the gross profit recognized in the fiscal year ended May 31, 2016, is $2,000,000.