Molder Construction Company uses the percentage-of-completion method of accounting. In 2010, Molder began work on a contract it had received which provided for a contract price of $7,400,000.Other details follow: Under the earnings approach, what should be the gross profit recognized in 2010?

Question

Molder Construction Company uses the percentage-of-completion method of accounting. In 2010, Molder began work on a contract it had received which provided for a contract price of $7,400,000.Other details follow:  Under the earnings approach, what should be the gross profit recognized in 2010?

Quizplus · Accepted Answer

Under the percentage-of-completion method, revenue, expenses, and gross profit are recognized based on the percentage of work completed. In this case, we are given no information about the costs incurred, but we are told that the work is 12% complete at the end of 2010.

To calculate the gross profit recognized in 2010, we need to know the total estimated gross profit on the contract and multiply it by the percentage of completion in 2010. The total estimated gross profit is the contract price ($7,400,000) minus the total estimated costs to complete the contract ($6,560,000):

Total estimated gross profit = $7,400,000 - $6,560,000 = $840,000

The percentage of completion in 2010 is 12%, so the gross profit recognized in 2010 is:

Gross profit recognized in 2010 = 12% x $840,000 = $100,800

Therefore, the correct answer is C) $840,000.

Molder Construction Company Uses the Percentage-Of-Completion Method of Accounting