The Naples Company uses the percentage-of-completion method and the cost-to-cost method for its long-term construction contracts.On one such contract, Naples expects total revenues of $260, 000 and total costs of $200, 000.During the first year, Naples incurred costs of $50, 000 and billed the customer $30, 000 under the contract.At what net amount should Naples' Construction in Progress for this contract be reported at the end of the first year?
A)$30, 000
B)$35, 000
C)$50, 000
D)$65, 000

Question

Quizplus · Accepted Answer

Under the percentage-of-completion method, the construction in progress is recognized based on the proportion of costs incurred to total expected costs. Thus, the percentage of completion at the end of the first year can be calculated as follows:

Percentage of completion = (Total costs incurred to date) / (Total expected costs) x 100%
Percentage of completion = ($50,000) / ($200,000) x 100%
Percentage of completion = 25%

Based on this percentage of completion, the revenue recognized to date would be:

Revenue recognized to date = (Percentage of completion) x (Total expected revenue)
Revenue recognized to date = (25%) x ($260,000)
Revenue recognized to date = $65,000

The amount of revenue actually billed to the customer ($30,000) is less than the revenue recognized to date ($65,000). This means that Naples has earned revenue that has not yet been billed. The amount of revenue earned but not yet billed is:

Revenue earned but not yet billed = Revenue recognized to date - Revenue billed to customer
Revenue earned but not yet billed = $65,000 - $30,000
Revenue earned but not yet billed = $35,000

The net amount of Construction in Progress would then be calculated as follows:

Construction in Progress = Total costs incurred - Total billings to customer + Revenue earned but not yet billed
Construction in Progress = $50,000 - $30,000 + $35,000
Construction in Progress = $55,000

Therefore, choice B is the best answer.

The Naples Company Uses the Percentage-Of-Completion Method and the Cost-To-Cost