This year,Hamilton,a local manufacturer of off-shore drilling platforms,entered into a contract to construct a drilling platform that will be placed in the North Atlantic Ocean.The total contract price is $5,000,000,and Hamilton estimates the total construction cost at $3,000,000.Actual costs incurred this year are $600,000.If Hamilton uses the percentage of completion method,the gross profit for this year is
A)$0.
B)$400,000.
C)$600,000.
D)$2,000,000.

Question

Quizplus · Accepted Answer

The percentage of completion method recognizes revenue and gross profit based on the progress of the construction. The percentage of completion is calculated as actual costs incurred ($600,000) divided by total estimated costs ($3,000,000), which is 20%. The total gross profit is $2,000,000 ($5,000,000 contract price - $3,000,000 estimated costs). Therefore, the gross profit recognized this year is 20% of $2,000,000, which is $400,000.

This Year,Hamilton,a Local Manufacturer of Off-Shore Drilling Platforms,entered into a Contract