Franklin Construction entered into a fixed-price contract to build a freeway-con

Question

Franklin Construction entered into a fixed-price contract to build a freeway-connecting ramp for $38 million. Construction costs incurred in the first year were $28 million and estimated remaining costs to complete at the end of the year were $19 million. How much gross profit or loss will Franklin recognize in the first year if it recognizes revenue over time according to percentage of completion method? (Enter your answer in millions.)

How much gross profit or loss will Franklin recognize in the first year applying the completed contract method? (Enter your answer in millions.)

Explanation / Answer

1. Percentage of Completion Method

Total costs = Incurred costs + Estimated costs to complete = $ 28m + $19m =                    

                                                                                               = $47m

Revenue to recognise = ( $ 28m / $ 47m x $ 38m) Less foreseeable losses of $ 9m

Net revenue to be recognised = $ 13.64m

Less : costs incurred                  ( $ 28m )
                                

     Gross Loss = $ 14.36m

2. Completed Contract Method

No revenue will be recognised, but foreseeable losses of $9m is recognised, so you will have a Gross Loss of $ 9m for this period.

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