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 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

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The percentage of completion method recognizes revenue based on the costs incurred to date as a percentage of total estimated costs. In year 1, the costs incurred are $900,000 out of an estimated total cost of $1,800,000, which is 50%. Therefore, 50% of the total contract revenue of $2,500,000 is recognized, which is $1,250,000. The gross profit for year 1 is the recognized revenue ($1,250,000) minus the costs incurred ($900,000), resulting in a gross profit of $350,000.

In Year 1 a Contractor Agrees to Build a Building