Multi-Storey Builders Ltd had a large three-year project with total revenue of $8 000 000 and estimated total costs of $6 500 000. The project was 20 per cent complete at the end of the first year, 70 per cent complete at the end of the second year and 100 per cent complete at the end of the third year. Revenues and costs were as estimated. How much profit was earned during the second year if the percentage of completion method was used?
A) $300 000
B) $750 000
C) $1 050 000
D) None of the above

Question

Quizplus · Accepted Answer

The percentage of completion method recognizes revenue and expenses based on the percentage of the project that is completed. At the end of the second year, the project was 70% complete. Therefore, 70% of the total revenue ($8,000,000) was recognized, which is $5,600,000. Similarly, 70% of the total costs ($6,500,000) were recognized, which is $4,550,000. The profit earned during the second year is the difference between the revenue and costs recognized during that year, which is $5,600,000 - $4,550,000 = $1,050,000.

Multi-Storey Builders Ltd Had a Large Three-Year Project with Total