Use the information below to answer the following questions:
On 1 January 2010, Romulus Ltd signed a contract worth $21 000 000 to construct a light rail from here to there. The light rail was to be built over 3 years, with progress payments of $7 000 000 to be made at the end of each year. Estimated costs were $15 000 000 and the following costs incurred and paid by Romulus Ltd were in accordance with estimates and represented the percentage completed in each year:
$\begin{array}{llcc}
& \text {\$ } \
\text {2010 } &\$ 8000000 \
\text { 2011 } &\$ 5000000 \
\text { 2012} &\$ 2000000 \
\text { } &\
\text { } &\
\end{array}$

The project was completed in December 2012.
-Using the percentage of completion method,what profit would Romulus Ltd report in 2010?
A) $800 000
B) $2 000 000
C) $3 200 000
D) $1 300 000.

Question

Use the information below to answer the following questions:
On 1 January 2010, Romulus Ltd signed a contract worth $21 000 000 to construct a light rail from here to there. The light rail was to be built over 3 years, with progress payments of $7 000 000 to be made at the end of each year. Estimated costs were $15 000 000 and the following costs incurred and paid by Romulus Ltd were in accordance with estimates and represented the percentage completed in each year:
$\begin{array}{llcc}
 & \text {\$  }   \
 \text {2010  } &\$ 8000000 \
 \text { 2011 } &\$ 5000000 \
 \text { 2012} &\$ 2000000 \
 \text {  } &\
 \text {  } &\
\end{array}$

The project was completed in December 2012.
-Using the percentage of completion method,what profit would Romulus Ltd report in 2010?
A) $800 000
B) $2 000 000
C) $3 200 000
D) $1 300 000.

Quizplus · Accepted Answer

To calculate the profit, we first need to calculate the revenue earned in 2010. As per the contract, Romulus Ltd would receive a payment of $7 000 000 at the end of each year. Since the contract was signed on 1 January 2010, Romulus Ltd would have completed 38.09% of the project by the end of the year. (i.e., $8 000 000 (costs incurred) / $21 000 000 (total contract value) = 0.3809 or 38.09%). Therefore, the revenue earned in 2010 would be $7 000 000 x 38.09% = $2 668 300. 
To calculate the profit, we need to subtract the total costs incurred in 2010 from the revenue earned in 2010. The total costs incurred in 2010 were $8 000 000. Therefore, the profit would be $2 668 300 - $8 000 000 = -$5 331 700. 
However, as per the percentage of completion method, we cannot report a negative profit. Instead, we need to prorate the total expected profit over the entire project based on the percentage of completion. The total expected profit is $6 000 000 ($21 000 000 (total contract value) - $15 000 000 (estimated costs)). Since Romulus Ltd completed 38.09% of the project in 2010, the prorated profit would be 38.09% x $6 000 000 = $2 287 400. 
Therefore, the profit that Romulus Ltd would report in 2010 would be $2 287 400. 
Hence, the answer is option C.

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