Brierton Company enters a contract at the beginning of year 1 to build a new federal courthouse for a price of $16 million. Brierton estimates that total cost of the project will be $12 million and will take four years to complete. $\begin{array}{lll}
&\text { Costs incurred }&\text { Payments from federal}\
&&\text { government}\
\text { Year 1 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 2 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 3 } & \$ 2 \text { million } & \$ 6 \text { million } \
\text { Year 4 } & \$ 2 \text { million } & \$ 6 \text { million }
\end{array}$
-If Brierton used percentage-of-completion method to account for this project, what would they have reported as profit in year 2?
A)$0
B)$1.33 million
C)$1.50 million
D)$0.67 million

Question

Brierton Company enters a contract at the beginning of year 1 to build a new federal courthouse for a price of $16 million. Brierton estimates that total cost of the project will be $12 million and will take four years to complete. $\begin{array}{lll}
&\text { Costs incurred }&\text { Payments from federal}\
&&\text {  government}\
\text { Year 1 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 2 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 3 } & \$ 2 \text { million } & \$ 6 \text { million } \
\text { Year 4 } & \$ 2 \text { million } & \$ 6 \text { million }
\end{array}$
-If Brierton used percentage-of-completion method to account for this project, what would they have reported as profit in year 2?
A)$0
B)$1.33 million
C)$1.50 million
D)$0.67 million

Quizplus · Accepted Answer

Using the percentage-of-completion method, revenue and expenses are recognized in proportion to the percentage of the project completed during the period.

In year 1, Brierton recognizes revenue of $4 million ($16 million contract price / 4 years) and expenses of $3 million ($12 million total cost / 4 years). This results in a gross profit of $1 million.

Assuming that Brierton completes 30% of the project in year 2, they would recognize revenue of $1.2 million ($4 million x 30%) and expenses of $0.9 million ($3 million x 30%). This results in a gross profit of $0.3 million ($1.2 million - $0.9 million).

Therefore, the answer is B) $1.33 million, which is not a choice in the question. The best choice is to choose the closest option, which is D) $0.67 million.

Brierton Company Enters a Contract at the Beginning of Year