If the percentage-of-completion method is used, what is the basis for determining the gross profit to be recognized in the second year of a three-year contract?
A) Cumulative actual costs incurred only
B) Incremental cost for the second year only
C) Cumulative actual costs and estimated costs to complete
D) No gross profit would be recognized in year 2

Question

Quizplus · Accepted Answer

The percentage-of-completion method recognizes revenue and gross profit in proportion to the percentage of work completed. In the second year of a three-year contract, the cumulative actual costs and estimated costs to complete will be used to determine the percentage of completion. The gross profit to be recognized in the second year will be calculated based on the proportion of work completed in relation to the total work required to complete the contract. Therefore, cumulative actual costs and estimated costs to complete are both necessary in determining the gross profit to be recognized in year 2.

If the Percentage-Of-Completion Method Is Used, What Is the Basis