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 sts incurred (during specifc $3,000,000 $6,000,000 $2.800,000 year) Estimated costs to complete end of year) Billings during the year $9.000,000 $3,200,000 $2.800,000 $3,000,000 $6,800,000 $6,600,000 $O $4,000,000 $4,600,000 Cash collections during the year

Explanation / Answer

Solution:

Total estimated cost of contract at the end of 2017 = Cost incurred + Estimated cost to complete

= (3000000+6000000) + 3000000 = $12,000,000

Total cost incurred till 2017 = $9,000,000

Percentage of completion = $9,000,000 / $12,000,000 = 75%

Total revenues to be recognized till 2017 = $14,000,000*75% = $10,500,000

% of completioin in 2016 = $3,000,000 / $12,000,000 = 25%

Revenue recognized in 2016 = $14,000,000*25% = $3,500,000

Revenue to be recognized in 2017 = $10,500,000 - $3,500,000 = $7,000,000

Cost incurred in 2017 = $6,000,000

Amount of profit recongized in 017 = $7,000,000 - $6,000,000 = $1,000,000

Hence 3rd option is correct.

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