A construction company entered into a fixed-price contract to build an office bu

Question

A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to complete at the end of the year were $9 million. The building was completed during the second year. Construction costs incurred during the second year were $10 million. How much revenue and gross profit or loss will the company recognize in the first and second year if it recognizes revenue upon contract completion?

Explanation / Answer

Contract price = 20,000,000

Costs incurred in the first year = 6,000,000

Estimated costs to complete at the end of the first year = 9,000,000

Under the completed contract method the profit is recognized in the year of completion and in case of any loss the loss is recognized immediately in the yaer of loss

Check for profit or loss :

Estimated profit = Contract price - costs incurred - estimated costs

= 20,000,000 - 6,000,000 - 9,000,000 = 5,000,000

As there is profit, it is not recognized untill completion of the contract

Profit in the second year = Contract price - costs incurred

= 20,000,000 - (6,000,000 + 10,000,000)

= 4,000,000

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