Final answer:
Gross profit using the percentage-of-completion method is calculated based on the total cost incurred and estimated costs to complete the project. For 2021, the gross profit is $1,527,000 and for 2022, it is $768,000. The correct answer is option b. $1,527,000 and $768,000.
Step-by-step explanation:
To calculate the gross profit using the percentage-of-completion method, we need to determine the percentage of the project completed each year and then apply it to the total contract value to find out how much revenue should be recognized each year. The costs incurred and the estimated costs to complete the project help to determine the stage of completion.
Calculation for 2021
Total Costs Incurred (2021): $2,865,000
Estimated Costs to Complete (End of 2021): $1,910,000
Total Estimated Costs: $2,865,000 + $1,910,000 = $4,775,000
Percentage of Completion for 2021: $2,865,000 / $4,775,000 = 60%
Revenue Recognized (60% of $7,320,000): $4,392,000
Gross Profit for 2021: Revenue Recognized - Costs Incurred = $4,392,000 - $2,865,000 = $1,527,000
Calculation for 2022
Total Costs Incurred (2022): $2,160,000
Estimated Costs to Complete (End of 2022): $0
Total Project Costs Incurred: $2,865,000 + $2,160,000 = $5,025,000
Project is completed in 2022, so 100% of the contract value is recognized
Revenue Recognized (2022) (Additional to 2021): $7,320,000 - $4,392,000 = $2,928,000
Gross Profit for 2022: Revenue Recognized - Costs Incurred = $2,928,000 - $2,160,000 = $768,000
The correct answer is option b. $1,527,000 and $768,000