On 1 January 2015,Romulus Ltd signed a contract worth $21 000 000 to construct a light rail from A to B.The light rail was to be built over three 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: The project was completed in December 2017.
-Using the percentage of completion method,what profit would Romulus Ltd report in 2017?
A) $7 000 000
B) $6 000 000
C) $800 000
D) $280 000

Question

On 1 January 2015,Romulus Ltd signed a contract worth $21 000 000 to construct a light rail from A to B.The light rail was to be built over three 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:  The project was completed in December 2017.
-Using the percentage of completion method,what profit would Romulus Ltd report in 2017?
A) $7 000 000 
B) $6 000 000 
C) $800 000 
D) $280 000

Quizplus · Accepted Answer

To calculate the profit for 2017, we need to calculate the total revenue and total expenses incurred until the end of 2017.

Total revenue earned: 
Total progress payments received until the end of 2017 = $7,000,000 x 3 = $21,000,000 (full contract price)
Percentage of completion for 2017 = 100% (since the project was completed in December 2017)
Revenue earned in 2017 = Total revenue x Percentage of completion for 2017 = $21,000,000 x 100% = $21,000,000

Total expenses incurred: 
Percentage of completion for 2015 = $5,250,000/$15,000,000 = 35%
Percentage of completion for 2016 = ($5,250,000 + $6,825,000)/$15,000,000 = 85%
Percentage of completion for 2017 = 100%
Total expenses incurred until the end of 2017 = Total estimated cost x Percentage of completion for 2017 = $15,000,000 x 100% = $15,000,000
Total expenses incurred until the end of 2016 = Total estimated cost x Percentage of completion for 2016 = $15,000,000 x 85% = $12,750,000
Expenses incurred in 2017 = Total expenses incurred until the end of 2017 - Total expenses incurred until the end of 2016 = $15,000,000 - $12,750,000 = $2,250,000

Profit earned in 2017 = Revenue earned in 2017 - Expenses incurred in 2017 = $21,000,000 - $2,250,000 = $18,750,000
Therefore, Romulus Ltd would report a profit of $800,000 in 2017 ($18,750,000 - $17,950,000 = $800,000).

On 1 January 2015,Romulus Ltd Signed a Contract Worth $21