88. When using the percentage-of-completion method ofaccounting for long-term co
ID: 2433520 • Letter: 8
Question
88. When using the percentage-of-completion method ofaccounting for long-term contracts, the percentage of completionused to recognize gross profit in the first year usually isdetermined by measuring:
A. Costs incurred in the first year, divided by estimatedremaining costs to complete the project.
B. Costs incurred in first year,divided by estimated total costs of the completed project.
C. Costs incurred in first year, divided by estimated grossprofit.
D. None of these is correct.
Aftertaking the quiz, the system said that NONE of these is correct. Ireally don't understand why None of these is correct ?
Explanation / Answer
Yes None of thesecorrect. Recognized gross profit = (TotalRevenue - Total estimated cost) % of Completeion Revenue- Cost to date For example : ========== A contractor obtained a contract to build home for $500,000.His estimated cost is $400,000. The following transactions occuredfor the first year of the contract: Paid Cash $10,000for permits, fees and other startup cost. Invoice from Subcontractorreceived for $10,000 First Progress billing isprepared for $60,000 Now we will take 2 examples viz. Accrual method and %Completion method ===================================================== Accrual %of Completion --------------------------------------- Revenue $60,000 $25,000 Percent of completion = (cost to date / total estimated cost) =$20,000 /$400,000 = 5% or5% of $500,000 = $25,000 Cost $20,000 $20,000 GrossProfit $40,000 $5,000 = Total Gross Profit x % of completion . = ($500,000- $400,000) x 5% = $100,000 x5% = $5,000 = Total Gross Profit x % of completion . = ($500,000- $400,000) x 5% = $100,000 x5% = $5,000Related Questions
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