Kinne Construction was contracted by Sitzabee Inc. to build a building. Kinne Co
ID: 2383108 • Letter: K
Question
Kinne Construction was contracted by Sitzabee Inc. to build a building. Kinne Construction provided an estimate that the building would take 18 months, starting on July 1 of the first year.
The agreed upon contract price was $2,250,000. By December 31 of the first year, Kinne Construction finished approximately one-third of the construction on the building (as agreed upon by the A/E) and subsequently billed Sitzabee Inc. $800,000. Kinne Construction incurred $610,000 in job costs on this project. The G&A cost for the first year was $25,000.
By the end of the second year, Kinne Construction finished the rest of the building and gained acceptance from Sitzabee Inc. For the second year, he billed Sitzabee Inc. $1,450,000 while incurring $1,140,000 in job costs. His G&A cost was $36,000.
Using the Percentage of Completion Method:
What is the reported profit and net income for each year for this project?
What is the total reported profit and net income for the project?
How does the amount billed relate to the reported income in a given year?
Using the Completed-Contract Method:
What is the reported profit and net income for each year for this project?
How does the amount billed relate to the reported income in a given year?
Explanation / Answer
Answer:
Percentage Completion Method:
The amount billed does not affect or relate to the profit recognized.
Completed Contract method:
Under this method profit is recognized only at the end completion of entire contract, and no profit is recognized till then.
So in given problem profit is recognized at end of 2nd year.
The amount billed at the end of contract should only be considered for arriving at profit rather than the contract price.
In $ Contract price 22,50,000 Estimated cost of the project First year construction cost 610000 2nd year Construction cost 1140000 Total 1750000 Gross/Reported profit on contract 500000 Less: G&A cost - Year 1 25000 Less: G&A cost - Year 2 36000 Net income 439000 1st Year 2nd Year Cost incurred till date 610000 1750000 Estimated cost to complete the project 1140000 1750000 % Completion 54% 100% 1st Year Reported Profit (Gross profit*Percentage completion) 267543.86 Less: G&A cost 25000 Net profit 242543.86 2nd Year Reported Profit = Profit (Gross profit*Percentage completion) less Profit already recognized in 1st year 232456.14 Less: G&A cost 36000 Net profit 196456.14Related Questions
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