Question

Indiana Co. began a construction project in 2021 with a contract price of $150 million to be received when the project is completed in 2023. During 2021, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed. In 2022, Indiana incurred additional costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project. Indiana:

A. Recognized $3.75 million loss on the project in 2022.B. Recognized $5.25 million gross profit on the project in 2022.C. Recognized $7.5 million gross profit on the project in 2022.D. Recognized $1.5 million loss on the project in 2022.

Answer 1

Indiana Co. recognized $1.5 million gross profit on the project in 2022 after updating its cost estimates and calculating the revenue based on the percentage of the contract completed.

Step-by-step explanation:

To determine how much revenue Indiana Co. recognized for its construction project in 2022, we first calculate the percentage of completion and then apply it to the contract price. By the end of 2021, Indiana Co. had incurred $36 million out of the total estimated costs of $120 million, representing 30% completion. Given that the total costs by the end of 2021 were $36 million and they incurred an additional $58.5 million in 2022, the total costs to date would be $94.5 million. With the revised total estimated costs being $135 million at the end of 2022, the project is now $94.5 million / $135 million = 70% complete.

To calculate the revenue recognized in 2022, we take 70% of the $150 million contract price, which is $105 million. Since Indiana Co. had already recognized 30% of the revenue by 2021, which amounts to $45 million (30% of $150 million), the revenue recognized in 2022 would be $105 million - $45 million = $60 million. By the end of 2022, the total costs are $94.5 million. To find the gross profit, we subtract the total costs from the revenue recognized to date: $60 million (2022 revenue) - $58.5 million (2022 costs) = $1.5 million gross profit.

Therefore, Indiana Co. recognized $1.5 million gross profit on the project in 2022.

Answer 2

Recognize $ 1.50 millions gross profit in 2022

Step-by-step explanation:

Year end 2021 Year end 2022

A Contract Price $150.00 $150.00

B Cost Incurred to Date $36.00 $94.50

($36 + $58.50)

C Estimated cost yet to be

incurred to complete

the contract $84.00 $0.50

Total Cost $120.00 $135.00

D = B+C

Percentage of Completion 30.00% 70.00%

E = (B ÷ D) × 100

Revenue to date $45.00 $105.00

F = A × E

G Revenue of Previous year $- $45.00

Net Revenue this year $45.00 $60.00

H = F - G

Cost to date $36.00 $94.50

I (=B)

J Cost to date of previous year $- $36.00

Net Cost for the year $36.00 $58.50

K = I - J

Gross Profits $9.00 $1.50

L = H - K

Therefore the correct answer is Recognize $ 1.50 millions gross profit in 2022 hence, option is not available.