Remington Construction Company uses the percentage-of-completion method. During 2014, the company entered into a fixed-price contract to construct a building for Sherman Company for $24,000,000. The following details pertain to the contract: The amount of construction costs incurred during 2015 was
A) $12,000,000.
B) $7,500,000.
C) $4,500,000.
D) $2,000,000.

Question

Remington Construction Company uses the percentage-of-completion method. During 2014, the company entered into a fixed-price contract to construct a building for Sherman Company for $24,000,000. The following details pertain to the contract:  The amount of construction costs incurred during 2015 was
A) $12,000,000. 
B) $7,500,000. 
C) $4,500,000. 
D) $2,000,000.

Quizplus · Accepted Answer

The percentage-of-completion method requires the company to recognize revenue and expenses as progress is made on the project. In order to determine the percentage of completion, the company uses the formula: 
Costs incurred to date / total estimated costs = percentage of completion

In this case, we are given the total contract price of $24,000,000 but not the total estimated costs. Therefore, we cannot determine the percentage of completion, as we do not know how much work has been done compared to how much still needs to be done.

However, we are told that the company entered into the contract in 2014, and that during 2015, some construction costs were incurred. Therefore, we can assume that progress was made on the project in 2015, and that some expenses were incurred.

Of the answer choices given, B is the most likely option. $7,500,000 is a reasonable amount of construction costs to have been incurred during one year of a $24,000,000 project. It is not so high as to suggest that the project is nearly complete, nor so low as to suggest that no progress has been made.

Remington Construction Company Uses the Percentage-Of-Completion Method