Jessup Construction, Inc. has consistently used the percentage-of-completion method of recognizing income. During 2011, Jessup started work on a $1,500,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, 2011:

How much loss should Jessup have recognized in 2011?
A) $15,000
B) $35,000
C) $50,000
D) $115,000

Question

Jessup Construction, Inc. has consistently used the percentage-of-completion method of recognizing income. During 2011, Jessup started work on a $1,500,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, 2011:

How much loss should Jessup have recognized in 2011?

How much loss should Jessup have recognized in 2011?
A) $15,000 
B) $35,000 
C) $50,000 
D) $115,000

Quizplus · Accepted Answer

Under the percentage-of-completion method, revenue and expenses are recognized based on the percentage of completion of the contract. In this case, the total estimated cost of the contract is $1,350,000 and Jessup incurred $1,400,000 of costs during the year. This means that the percentage of completion is 1,400,000/1,350,000 = 103.7%. Since the percentage of completion is over 100%, this indicates that Jessup has gone over budget on the project and will experience a loss.

To calculate the amount of the loss, we can use the formula:

Total contract revenue - Total estimated costs = Gross profit 
$1,500,000 - $1,350,000 = $150,000

Then, we can multiply the gross profit by the percentage of completion to determine how much profit should have been recognized to date:

$150,000 x 103.7% = $155,550

However, Jessup actually recognized $105,550 of profit during the year, which means they should have recognized an additional $50,000 ($155,550 - $105,550) of expense. This indicates that they experienced a loss of $50,000 on the project.

Therefore, the answer is C) $50,000.