Lake Construction Company uses the percentage-of-completion method for long-term construction contracts. The company has a project with a contract price of $7,000 on which $600 of gross profit has been recognized in prior years. Information for the current year is as follows:

What is the loss that Lake should recognize in the current year?
A) $600
B) $800
C) $1,400
D) No loss should be recognized.

Question

Lake Construction Company uses the percentage-of-completion method for long-term construction contracts. The company has a project with a contract price of $7,000 on which $600 of gross profit has been recognized in prior years. Information for the current year is as follows:

What is the loss that Lake should recognize in the current year?

What is the loss that Lake should recognize in the current year?
A) $600 
B) $800 
C) $1,400 
D) No loss should be recognized.

Quizplus · Accepted Answer

The contract has a total estimated cost of $11,000 and the total cost incurred to date is $9,000. Therefore, the remaining cost to complete the contract is $2,000. The percentage of completion for the current year is 75% (9,000 ÷ 12,000). Revenue recognized in the current year is $5,250 (7,000 x 75%). Expected total gross profit is $900 (7,000 - 6,100). Since the gross profit recognized to date is $600, the remaining gross profit to be recognized is $300. However, since the expected total gross profit of $900 is less than the gross profit recognized to date of $600, Lake should recognize a loss equal to the difference of $300. Therefore, the loss that Lake should recognize in the current year is $1,400 ($600 previously recognized gross profit - $300 remaining gross profit + $1,500 loss).

Lake Construction Company Uses the Percentage-Of-Completion Method for Long-Term Construction