The following scenario will be used for the next three questions Miser Construct

Question

The following scenario will be used for the next three questions Miser Construction Company (who applies the Percentage of Completion method) was the low bidder on a construction project to build a bridge for $14,000,000. The project was begun in 2016 and completed in 2018. Cost and other data are presented below ("costs incurred" are for each particular year): 2016 2017 2018 Costs incurred (during specific year) Estimated costs to complete (end of year) Billings during the year $3,0.000 $6,000,000 $2.800,000 $9,000,000 $3,000,000 $6,800,000 $6,600,000 $0 54,000,000 $4,600,000 $3,200,000 Cash collections during the year $%2,800,000

Explanation / Answer

Gross profit to be recognized under the percentage of completion method = (costs to date/total estimated costs*expected profits) - previously recognized profits

Costs to date = $3,000,000

Total estimated costs = Costs to date + Estimated costs to complete at the year end

= $3,000,000 + $9,000,000

= $12,000,000

Expected profits = Contract price - Total estimated costs

= $14,000,000 - $12,000,000

= $2,000,000

Previously recognized profits = $0

Profit to be recognized in 2016 = ($300,000/$12,000,000*$2,000,000) - $0

= $500,000

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