Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method. In 2014, the company entered into a contract to construct a building for $900,000. Camelia estimated that the cost of constructing the building would be $600,000. In 2014, the company incurred $150,000 in costs under the contract. In 2015, the company incurred an additional $500,000 in costs to complete the contract. The company's marginal tax rate in all years was 35%.

Question

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According to the percentage of completion method, income is recognized proportionately as costs are incurred. Camelia has incurred $150,000 in costs in 2014 and has estimated total costs of $600,000, which means that it is 25% complete ($150,000/$600,000). Therefore, Camelia should recognize 25% of the total contract revenue of $900,000, which is $225,000. However, since only 75% of the revenue remains to be earned, Camelia should recognize only 75% of the $225,000 earned so far, which is $168,750. This amount represents the revenue earned in 2014, which is subject to tax in that year. Therefore, Camelia must recognize $75,000 of income in 2014.

Camelia Company Is a Large Commercial Real Estate Contractor That