Final answer:
The gross profit recognized by the Cumberland Construction Company in 2016 using the percentage-of-completion method cannot be determined from the answer choices provided, as the additional revenue recognized was less than the additional costs incurred, resulting in a gross loss.
Step-by-step explanation:
Calculating Gross Profit using Percentage-of-Completion Method
To calculate the amount of gross profit recognized in 2016 for Cumberland Construction Company using the percentage-of-completion method, we need to apply the formula: ((Total costs to date / Total estimated costs) * Contract price) - (Revenue recognized to date - Costs to date). From the given information, the construction costs incurred by 2016 add up to $136,000 (2014) + $546,500 (2015) + $200,000 (2016) = $882,500. The contract price is $1,000,000. The gross profit recognized in 2016 would be the revenue recognized in 2016 minus the costs incurred in that year.
The company would have recognized 100% of the revenue in 2016 since there are no estimated costs to complete left, which means the total revenue recognized is the contract price of $1,000,000. In 2015, the company had recognized revenue based on the costs incurred up to that point. Gross profit recognized by the end of 2015 would be total revenue recognized by 2015 minus costs incurred by 2015. Therefore, the gross profit recognized in 2016 would be the additional revenue recognized (which is all remaining revenue since the project is completed) minus the additional costs incurred in 2016.
Since $882,500 in costs had been incurred by the end of 2016 and the entire project is completed, the entire $1,000,000 revenue has been recognized. The revenue recognized before 2016 was $882,500, which means an additional $117,500 in revenue was recognized in 2016. Our calculation: $117,500 (additional revenue recognized in 2016) - $200,000 (additional costs incurred in 2016) equals a negative amount, which shows there is no gross profit but rather a gross loss. Thus, none of the answer choices A) $30,000 B) $40,000 C) $50,000 D) $60,000 are correct as there was no gross profit, but instead a gross loss.