Question

Before bidding on a contract, Swallow generally makes three estimates of total contract costs: (1) optimistic, (2) pessimistic, and (3) most likely (based on a blending of optimistic and pessimistic assumptions). The company has asked you to write a letter explaining which of these estimates should be used for percentage of completion purposes. In writing your letter, you should consider the fact that Swallow is incorporated and has made an S corporation election. Therefor, the income deductions flow through to the shareholders who are all individuals in the 35% marginal tax bracket. The relevant Federal interest rate is 8%.

Answer 1

The most likely estimate should be used for percentage of completion purposes. It provides a balanced and realistic estimate of project costs, ensuring accurate revenue calculations.

Step-by-step explanation:

When determining which estimate to use for percentage of completion purposes, it is important to consider the nature of the estimates and the requirements of the project. In this case, Swallow generally makes three estimates of total contract costs: optimistic, pessimistic, and most likely. The most likely estimate is typically used for percentage of completion purposes.

The most likely estimate is based on a blending of optimistic and pessimistic assumptions, which provides a balanced and realistic estimate of the project costs. Using this estimate ensures that the percentage of completion calculation reflects the true progress of the project and avoids any potential overstatement or understatement of revenue.

In addition, it is important to note that the company is incorporated and has made an S corporation election. This means that the income deductions flow through to the shareholders who are all individuals in the 35% marginal tax bracket. The relevant Federal interest rate is 8%. These factors should be taken into consideration when determining the estimate to use for percentage of completion purposes.