The following info relates to Pell Company\'s construction jobswhich commenced d
ID: 2433395 • Letter: T
Question
The following info relates to Pell Company's construction jobswhich commenced during 2008.Project1 Project2 ContactPrice 420,000 300,000 Costs incurredduring the2008 240,000 280,000 Estimated coststo complete 120,000 40,000 Billed tocustomers during 2008 150,000 270,000 Received fromcustomers during 2008 90,000 250,000
1. If Pell used the completed contract method, what amount of grossprofit or loss would it report in its 2008 income statement?
2. If Pell used the percentage of completion method, what amount ofgross profit or loss would it report in its 2008 incomestatement?
Project1 Project2 ContactPrice 420,000 300,000 Costs incurredduring the2008 240,000 280,000 Estimated coststo complete 120,000 40,000 Billed tocustomers during 2008 150,000 270,000 Received fromcustomers during 2008 90,000 250,000
Explanation / Answer
1. If Pellused the completed contract method, what amount of gross profit orloss would it report in its 2008 income statement?NoRevenue and cost would be accounted for in the year2008 The Total Sales Revenue and cost would be recognizedonly in the year in which the Projeats are completed. 2. If Pell used the percentage ofcompletion method, what amount of gross profit or loss would itreport in its 2008 income statement?
under percent completion method recognized profit may becalculated on the basis of following formula : ====================================================================== Costincurred so fare ---------------------------- x EstimatedProfit - Previous years' profit total expectedproject cost Preject1 ======= $240,000(Cost incurred so far) ------------------------------------------------------ x($420,000 - $240,000-$120,000 - 0) $240,000 +$120,000(estimated cost to complete) = $240,000 ------------ x$60,000 = $80,000 $360,000 Preject2
======= $280,000(Cost incurred so far) ------------------------------------------------------ x($300,000 - $280,000 - $40,000 - 0) $280,000 +$40,000(estimated cost to complete) = $280,000 ------------ x-$20,000 = -$17,500 $320,000 So total gross profit to be reported for 2008 =$180,000(Project 1) + $-17,500(Project B) = 62,500 There was an omission of estimated costof completion in Project 1 and Project 2 to the extent of $120,000and $40,000 respectively for the purpose of deriving total grossprofit on the contract amount. The above solution has been dulymodified accordingly.
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