In 2017, Cashmere Construction Company enters into a contract to build a beach cottage for Martha and Rob for a total price of $500,000. Cashmere estimates the total cost to complete the cottage to be $400,000. In 2017, Cashmere incurred $300,000 of costs on the contract, and in 2018 the contract was completed at a total cost of $425,000. Cashmere is not required to recognize any income from the contract until 2018.

Question

Quizplus · Accepted Answer

The percentage-of-completion method requires recognizing income proportionally based on costs incurred. Since Cashmere incurred $300,000 of costs in 2017 out of the estimated total cost of $400,000, they have completed 75% of the contract in 2017 (300,000/400,000). Therefore, they can recognize 75% of the total estimated profit of $100,000 in 2017, which is $75,000. However, since they are not required to recognize any income until 2018, they will defer recognizing this income until then.

In 2017, Cashmere Construction Company Enters into a Contract to Build