Monroe Construction Company uses the percentage-of-completion method of accounting.In 2012, Monroe began work on a contract it had received which provided for a contract price of $15,000,000.Other details follow:

What should be the gross profit recognized in 2012?

Question

Monroe Construction Company uses the percentage-of-completion method of accounting.In 2012, Monroe began work on a contract it had received which provided for a contract price of $15,000,000.Other details follow:

What should be the gross profit recognized in 2012?

Quizplus · Accepted Answer

To calculate the percentage-of-completion method, we need to use the formula: 
Total Costs to Date / Total Estimated Costs = Percentage Completed
In 2012, the total costs incurred were $8,400,000 ($6,000,000 incurred in 2012 + $2,400,000 in beginning inventory). The estimated total cost of the contract is $12,000,000. Therefore, the percentage completed in 2012 is 70% (8400000/12000000).

Next, we need to use this percentage to calculate the gross profit recognized in 2012. The total gross profit on the contract is $4,500,000 ($15,000,000 contract price - $10,500,000 estimated total cost). To determine the gross profit recognized in 2012, we multiply the total gross profit by the percentage completed in 2012: $4,500,000 x 70% = $3,150,000. Finally, we subtract the gross profit recognized in previous years to determine the gross profit recognized in 2012: $3,150,000 - $1,350,000 = $1,800,000.

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