Q32 A construction company entered into a fixed-price contract to build an offic
ID: 2580062 • Letter: Q
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Q32 A construction company entered into a fixed-price contract to build an office building for $26 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. Required: How much gross profit will the company recognize in the first year and in the second year applying the completed contract method? Year 1 Year 2 Gross proftExplanation / Answer
The gross profit in year 1 equals zero
The gross profit in year 2 equals $ 26 million - [ construnction cost in year 1 + construction cost in year 2 ]
Gross profit in year 2 = $ 26 million - [ $ 6 m + $ 10 m ]
Gross profit in year 2 = 10 million
Explanation : - The completed contract method postpones revenue recognition until the seller completes all construction or production and transfers the finished product to the customer.
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