Camelia Company is a large commercial real estate contractor that reports its in

Question

Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method. In 2017, the company entered into a contract to construct a building for $900,000. Camelia estimated that the cost of constructing the building would be $600,000. In 2017, the company incurred $150,000 in costs under the contract. In 2018, the company incurred an additional $500,000 in costs to complete the contract. The company's marginal tax rate in all years was 35%.

a.Camelia is not required to report any income from the contract until 2018 when the contract is completed.

b.Camelia should amend its 2017 tax return to decrease the profit on the contract for that year.

c.Camelia must report $300,000 of income in 2017.

d.Camelia must recognize $75,000 of income in 2017.

e.None of these choices are correct.

Explanation / Answer

d.Camelia must recognise $75,000 of income in 2017.

since percentage of completion method is used,

we need to recognise the following amount as income in 2017.

=> (expenditure incurred till 2017 / estimated total expenditure)* (contract amount - estmated total expenditure)

=>($150,000 / 600,000)*($900,000 - 600,000)

=>$75,000.

This amount is to be recognised in 2017.

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