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 cost-recovery method to recognize revenue, how much gross profit (loss) related to the project should they recognize in the first year?

Question

Quizplus · Accepted Answer

Under the cost-recovery method, revenue is recognized only to the extent of costs incurred that are expected to be recoverable. Since the total expected costs ($5,500,000) exceed the contract price ($5,000,000), the project will result in a loss. The entire expected loss of $500,000 should be recognized in the first year.