Hillier Construction Ltd commenced the construction of a building on 1 July 2003. It has a fixed-price contract for total revenues of $45 million. The expected completion date is 30 June 2006. The expected total cost to Hillier Construction at the beginning of the project is $35 million. The following information relates only to the construction of this building:

Hillier Construction uses the percentage of completion method based on cost to account for its construction contracts. What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)?
E) None of the given answers.

Question

Hillier Construction Ltd commenced the construction of a building on 1 July 2003. It has a fixed-price contract for total revenues of $45 million. The expected completion date is 30 June 2006. The expected total cost to Hillier Construction at the beginning of the project is $35 million. The following information relates only to the construction of this building:

Hillier Construction uses the percentage of completion method based on cost to account for its construction contracts. What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000) ?

Hillier Construction uses the percentage of completion method based on cost to account for its construction contracts. What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)?
E) None of the given answers.

Quizplus · Accepted Answer

To calculate gross profit, we need to first calculate the total expected costs and expected gross profit:

Expected costs = $35,000,000
Expected gross profit = $45,000,000 - $35,000,000 = $10,000,000

Next, we need to calculate the percentage of completion and apply it to the expected gross profit to find the gross profit to be recognized each year:

Year 1:
Percentage of completion = 12/36 = 33.33%
Gross profit to be recognized = $10,000,000 x 33.33% = $3,333,333

Year 2:
Percentage of completion = 24/36 = 66.67%
Gross profit to be recognized = $10,000,000 x (66.67% - 33.33%) = $3,333,333

Year 3:
Percentage of completion = 36/36 = 100%
Gross profit to be recognized = $10,000,000 x (100% - 66.67%) = $3,333,334

Therefore, the answer is B, as it gives the correct amounts of gross profit to be recognized in each year.

Hillier Construction Ltd Commenced the Construction of a Building on 1