Brierton Company enters a contract at the beginning of year 1 to build a new federal courthouse for a price of $16 million. Brierton estimates that total cost of the project will be $12 million, and will take four years to complete.
$$\begin{array} { | l | c | c | }
\hline & \text { Costs incurred } & \begin{array} { c }
\text { Payments from federal } \
\text { government }
\end{array} \
\hline \text { Year 1 } & \$ 4 \mathrm { M } & \$ 2 \mathrm { M } \
\hline \text { Year 2 } & \$ 4 \mathrm { M } & \$ 2 \mathrm { M } \
\hline \text { Year 3 } & \$ 2 \mathrm { M } & \$ 6 \mathrm { M } \
\hline \text { Year 4 } & \$ 2 \mathrm { M } & \$ 6 \mathrm { M } \
\hline
\end{array}$$
-If Brierton used percentage-of-completion method to account for this project, what would they have reported as profit in year 2?
A) $ 0
B) $ 1.333M
C) $ 1.5M
D) $ 0.667M

Question

Brierton Company enters a contract at the beginning of year 1 to build a new federal courthouse for a price of $16 million. Brierton estimates that total cost of the project will be $12 million, and will take four years to complete.
 $$\begin{array} { | l | c | c | } 
\hline & \text { Costs incurred } & \begin{array} { c } 
\text { Payments from federal } \
\text { government }
\end{array} \
\hline \text { Year 1 } & \$ 4 \mathrm { M } & \$ 2 \mathrm { M } \
\hline \text { Year 2 } & \$ 4 \mathrm { M } & \$ 2 \mathrm { M } \
\hline \text { Year 3 } & \$ 2 \mathrm { M } & \$ 6 \mathrm { M } \
\hline \text { Year 4 } & \$ 2 \mathrm { M } & \$ 6 \mathrm { M } \
\hline
\end{array}$$
-If Brierton used percentage-of-completion method to account for this project, what would they have reported as profit in year 2?
A) $ 0
B) $ 1.333M
C) $ 1.5M
D) $ 0.667M

Quizplus · Accepted Answer

The percentage-of-completion method recognizes revenue and expenses in proportion to the percentage of the project completed. In year 2, Brierton would have completed 2/4 or 50% of the project (cumulative completed percentage is 25% + 25% = 50%) and recognized revenue of $8 million (50% of the contract price) and expenses of $6 million (50% of total estimated cost), resulting in a profit of $2 million. However, they received payments of $2 million from the government during the same year, so the actual profit recognized in year 2 would be $2M - $2M = $1.333M (B).

Brierton Company Enters a Contract at the Beginning of Year