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 $40 million. Construction costs incurred during the first year were $12 million and estimated costs to complete at the end of the year were $18 million. During the first year the company billed its customer $13 million, of which $7 million was collected before year-end.

What would appear in the year-end balance sheet related to this contract using Percentage-of-completion method? (Enter your answers in whole dollars.)

Explanation / Answer

using the percentage-of-completion method
Total costs = Incurred costs + estimated costs to complete = $6m + $9m = $15m
Revenue to recognise = $6m/$15m x $20m = $8m
less costs incurred $6m
= gross profit $2m

applying the completed contract method
Year 1: No revenue would be recognised. Costs incurred would be taken to work in progress.

Year 2: Revenue recognised $20m
- Costs recognised $16m ($6m + $10m)
= gross profit $4m

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.