Pont Bridges Corp.had signed a contract to build a new bridge for $5,000,000.Initially their estimated total costs were $4,400,000.During the first year, they realized their costs were going to be greater than originally estimated.They now expect total costs to be $5,500,000, but they cannot change the contract price.If Pont uses the percentage-of-completion method to recognize revenue, how much gross profit (loss) related to the project should they recognize in the first year?

Question

Quizplus · Accepted Answer

The gross profit (loss) is calculated based on the percentage of completion and the revised total cost estimate. Initially, the contract was for $5,000,000 with estimated costs of $4,400,000, leading to an expected gross profit of $600,000. However, with the revised costs of $5,500,000, the project is now expected to incur a gross loss of $500,000 ($5,000,000 contract price - $5,500,000 revised total costs). The percentage-of-completion method requires recognizing revenue and expenses based on the project's progress, including any expected losses immediately.