Carbon Corporation had a $2,000,000 contract to build a small hospital with total costs estimated at $1,600,000.It received the following payments and incurred the following expenses over the three-year contract period:
$\begin{array}{lll}
\underline{\text { Year } }&\underline{ \text { Payments }}& \underline{\text { Expenses }}\
1 & \$ 400,000 & \$ 300,000 \
2 & \$ 1,200,000 & \$ 900,000 \
3 & \$ 400,000 & \$ 550,000
\end{array}$

Under the percentage-of-completion method, how much profit should Carbon recognize in year 2?
A)$400,000
B)$300,000
C)$225,000
D)$150,000

Question

Carbon Corporation had a $2,000,000 contract to build a small hospital with total costs estimated at $1,600,000.It received the following payments and incurred the following expenses over the three-year contract period: 
$\begin{array}{lll}
\underline{\text { Year } }&\underline{ \text { Payments }}& \underline{\text { Expenses }}\
1 & \$ 400,000 & \$ 300,000 \
2 & \$ 1,200,000 & \$ 900,000 \
3 & \$ 400,000 & \$ 550,000
\end{array}$

Under the percentage-of-completion method, how much profit should Carbon recognize in year 2?
A)$400,000
B)$300,000
C)$225,000
D)$150,000

Quizplus · Accepted Answer

The percentage-of-completion method recognizes revenue and profit based on the progress of the construction project. To calculate the profit recognized in year 2, we first determine the total profit from the contract, then calculate the percentage of completion up to year 2, and finally apply this percentage to the total profit to find the profit recognized by year 2, subtracting the profit recognized in year 1.Total contract value = $2,000,000Total estimated costs = $1,600,000Total profit = $2,000,000 - $1,600,000 = $400,000Expenses by the end of year 2 = $300,000 (year 1) + $900,000 (year 2) = $1,200,000Percentage of completion by the end of year 2 = $1,200,000 / $1,600,000 = 75%Profit to be recognized by the end of year 2 = 75% of total profit = 0.75 * $400,000 = $300,000Profit recognized in year 1 = (Year 1 expenses / Total estimated costs) * Total profit = ($300,000 / $1,600,000) * $400,000 = 18.75% of $400,000 = $75,000Profit recognized in year 2 = Profit by the end of year 2 - Profit recognized in year 1 = $300,000 - $75,000 = $225,000

Carbon Corporation Had a $2,000,000 Contract to Build a Small