Question

At the beginning of 2013, the Harding Construction Company received a contract to build an office building for $10 million. Harding will construct the building according to specifications provided by the buyer, and the project is estimated to take three years to complete. According to the contract, Harding will bill the buyer in installments over the construction period according to a prearranged schedule. Information related to the contract is as follows:

2013 2014 2015
Cost incurred during the year $2,300,000 $3,600,000 $2,100,000
Estimated costs to complete 5,300,000 2,000,000 0
Billings during the year 1,700,000 4,000,000 4,300,000
Cash collections during the year 1,600,000 3,600,000 4,300,000
Calculate the following:
Gross profit : Percentage of completion Completed contract
recognized Method Method
2013
2014
2015
Total gross profit:

Answer 1

gross profit percentage of completion method:

2013: 726,300

2014: 841,700

2015: 432,000

completed contract

we recognize the profit at the end:

2013: zero

2014: zero

2015: 2,000,000

Step-by-step explanation:

percentage of completion

2013:

we incurred 2,300,000

over a total cost of 2,300,000 + 5,300,000 = 7,600,000

the percentage complete will be:

2,300,000 / 7,600,000 = 30.263% percentage of completion

we multiply this be the revenue:

$10,000,000 x 30,263% = $3,026,300

less 2,300,000 cost

gross profit: 726,300 dollars

2014:

we incurred 3,600,000

so far we have cost for 2,300,000 + 3,600,000 = 5,900,000

for a total cost of 7,900,000

5,900,000 / 7,900,000 = 74.68% percentage of completion

we multiply this but, subtract previous revenue recognized:

10,000,000 x (74.68% - 30,263%) = 4,441,700 revenue

less 3,600,000 cost: 841,700 gross profit

2015:

we complete the project so we recognize the rest of the revenue.

10,000,000 x (100% - 74.68%) = 2,532,000

cost of the year 2,100,000

gross profit: 432,000

completed contract:

10,000,000 contract value less cost:

2013 2,300,000

2014 3,600,000

2015 2,100,000

total 8,000,000

gross profit 2,000,000