In Year 1,a contractor agrees to build a building for $2,500,000 by the end of Year 2.The builder's cost is estimated to be $1,800,000.The actual costs for Year 1 are $900,000 and Year 2's actual costs are $1,100,000.Under the percentage of completion method Year 1's gross profit is
A)$0.
B)$300,000.
C)$350,000.
D)$700,000.

Question

Quizplus · Accepted Answer

The percentage of completion method recognizes revenue and expenses as a percentage of the work completed. To determine the gross profit for Year 1, we need to calculate the percentage of work completed during that year.

The formula for percentage of completion is: 
Percentage of completion = (Total actual costs incurred to date) / (Total estimated costs)

To apply this formula, we need to know the total estimated costs of the project. The contractor agreed to build the building for $2,500,000 by the end of Year 2, so we can assume that the total estimated costs are $2,500,000.

Using the formula, we can calculate the percentage of completion for Year 1:
Percentage of completion = ($900,000 actual costs in Year 1) / ($2,500,000 total estimated costs) 
Percentage of completion = 36%

This means that Year 1 represents 36% of the total work to be done on the project. To determine the gross profit for Year 1, we use the following formula: 
Gross profit = (Percentage of completion x Total contract price) - Total actual costs incurred to date

Gross profit = (0.36 x $2,500,000) - $900,000 
Gross profit = $350,000.

Therefore, the correct answer is C, $350,000.

In Year 1,a Contractor Agrees to Build a Building for $2,500,000