Question

Swallow Company is a large real estate construction company that has made a Subchapter S election. The company reports its income using the percentage of completion method. In 2018, the company completed a contract at a total cost of $4.8 million. The contract price was $7.2 million. At the end of 2017, the year the contract was begun, Swallow estimated that the total cost of the contract would be $5.4 million. Total accumulated cost on the contract at the end of 2017 was $1.8 million. The relevant tax rate in 35%, and the relevant Federal interest rate in 5%. Assume that all income tax returns were filed and taxes were aid on March 15 following the end of the calendar tax year.

Compute the gross profit on the contract for 2017 and 2018.

Answer 1

The gross profit for Swallow Company for 2017 and 2018 is calculated using the percentage of completion method, considering the estimated and actual costs, and the contract price.

Step-by-step explanation:

The gross profit on the contract for Swallow Company, which uses the percentage of completion method, for the years 2017 and 2018 can be calculated. In 2017, the company estimated the total cost to be $5.4 million and had accumulated costs of $1.8 million by the end of that year. The revenue recognized in 2017 can be calculated as the ratio of accumulated costs to estimated total costs multiplied by the contract price, giving us ($1.8 million / $5.4 million) * $7.2 million. The gross profit for 2017 is then the recognized revenue minus the accumulated costs.

For 2018, we use the actual total costs of $4.8 million and the contract price of $7.2 million to determine the gross profit. The revenue recognized in 2018 is the contract price minus the revenue already recognized in 2017. The final gross profit for 2018 is the recognized revenue in 2018 minus the difference in accumulated costs between 2017 and 2018.