Question

A construction company entered into a fixed-price contract to build an office building for $28 million. Construction costs incurred during the first year were $8 million and estimated costs to complete at the end of the year were $12 million.

How much revenue will appear in the company's income statement in the first year using the percentage-of-completion method? (Enter your answer in whole dollars.)
How much gross profit or loss will the company recognize in the first year using the percentage-of-completion method? (Enter your answer in whole dollars.)

Answer 1

Total costs = Incurred costs + Estimated costs to complete

Total costs = $8 million + $12 million

Total costs = $20 million

a. How much revenue will appear in the company's income statement in the first year using the percentage-of-completion method?

Revenue to recognize = Incurred costs/Total costs * Contract price

Revenue to recognize = $8 million / $20 million * $28 million

Revenue to recognize = $11.2 million

b. How much gross profit or loss will the company recognize in the first year using the percentage-of-completion method?

Gross Profit to Recognized = Revenue recognized - Costs incurred

Gross Profit to Recognized = $11.2 million - $8 million

Gross Profit to Recognized = $3.2 million