Danco Corporation contracted to construct a construction crane over the current and the next two years. The contract price is $2,000,000 and construction costs are estimated at $1,600,000. Determine Danco's income in this and the next two years given the following information:
Year 1: actual costs = $250,000
Year 2: actual costs = $975,000
Year 3: actual costs = $425,000
a. under the percentage-of-completion method.
b. under the completed contract method.

Question

Quizplus · Accepted Answer

The Answer is a. Percentage-of-Completion: Year 1: $250,000/$1,600,000 = 15.63% complete at the end of year 1. $2,000,000 x .1563 = $312,600 revenue less $250,000 actual costs = $62,600 net income. Year 2: ($250,000 + $975,000)/$1,600,000 = 76.56% complete at then end of year 2. $2,000,000 x .7656 = $1,531,200 total revenue. Year 2 revenue = ($1,531,200 - $1,225,000) - $62,600 recognized in year 1 = $306,200 - $62,600 = $243,600. Year 3: $2,000,000 - ($250,000 + $975,000 + $425,000) = $2,000,000 - $1,650,000 = $350,000 years 1-3 net revenue - $306,200 net revenue recognized in years 1-2 = $43,800 recognized in year 3.b. Under the completed contract method, Danco will recognize $2,000,000 of revenue and $1,650,000 of expenses for net revenue of $350,000 in year 3.

Danco Corporation Contracted to Construct a Construction Crane Over the Current