Russell Ltd commenced the construction of a bridge on 1July 2003. It has a fixed-price contract for total revenues of $35million. The expected completion date is 30 June 2006. The expected total cost to Russell Ltd at the beginning of the project is $29 million. The following information relates only to the construction of the bridge:

Russell Ltd 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

Russell Ltd commenced the construction of a bridge on 1July 2003. It has a fixed-price contract for total revenues of $35million. The expected completion date is 30 June 2006. The expected total cost to Russell Ltd at the beginning of the project is $29 million. The following information relates only to the construction of the bridge:

Russell Ltd 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 the gross profit to be recognized in each of the 3 years, we need to first calculate the total expected costs and expected gross profit over the entire project duration.

Total expected costs = $29 million
Expected gross profit = $35 million - $29 million = $6 million

To determine the gross profit recognized in each year, we need to calculate the percentage of completion at the end of each year, and multiply this by the total expected gross profit.

Year 1 (1 July 2003 to 30 June 2004):
Total cost incurred = $6 million
Percentage of completion = ($6 million / $29 million) x 100% = 20.69%
Gross profit recognized in Year 1 = 20.69% x $6 million = $1,241,400 (rounded to nearest $000)

Year 2 (1 July 2004 to 30 June 2005):
Total cost incurred = $13 million
Percentage of completion = ($13 million / $29 million) x 100% = 44.83%
Gross profit recognized in Year 2 = (44.83% - 20.69%) x $6 million = $1,068,200 (rounded to nearest $000)

Year 3 (1 July 2005 to 30 June 2006):
Total cost incurred = $23 million
Percentage of completion = ($23 million / $29 million) x 100% = 79.31%
Gross profit recognized in Year 3 = (79.31% - 44.83%) x $6 million = $2,106,600 (rounded to nearest $000)

Therefore, the gross profit to be recognized in each of the 3 years (rounded to the nearest $000) is:
Year 1: $1,241,000
Year 2: $1,068,000
Year 3: $2,107,000

The closest answer choice is B which matches these values.

Russell Ltd Commenced the Construction of a Bridge on 1July