Question

Eilert Construction Company had a contract starting April 2021, to construct a $42,000,000 building that is expected to be completed in September 2022, at an estimated cost of $38,500,000. At the end of 2021, the costs to date were $17,710,000 and the estimated total costs to complete had not changed. The progress billings during 2021 were $8,400,000 and the cash collected during 2021 was $5,600,000. Eilert uses the percentage of completion method. For the year ended December 31, 2018, Eilert would recognize gross profit on the building of:__________

a. $0.
b. $1,475,833.
c. $1,610,000.
d. $1,890,000.

Answer 1

c. $1,610,000

Step-by-step explanation:

Percentage of completion method is used to estimate the expenditures and revenue of a long term project on the basis of percentage of work that is completed in the period.

Apart from this method GAAP also allows completed contract method that involves full completion of project to recognise revenue.

Therefore revenue will be

Revenue = (contract amount - cost at end of the project completion) * (cost incurred at period of consideration ÷ cost at the end of the project completion)

Revenue = (42,000,000 - 38,500,000) * (17,710,000 ÷ 38,500,000)

Revenue = 3,500,000 * 0.46 = $1,610,000