Excess Construction Corp. has a $16 million contract to construct a building. The company estimates $10.4 million in costs to construct the building and an expected gross profit of $5.6 million. During the current year, the company incurred $3,120,000 of costs on the contract.
Under the percentage-of-completion method, how much will Excess Construction Corp. report as revenue in the current year?

Question

Quizplus · Accepted Answer

The percentage-of-completion method recognizes revenues by determining the costs incurred per the contract as compared to its total expected cost. The revenue to be recognized in the year at hand is calculated by dividing cost incurred during the year at hand by total estimated costs and multiplying this percentage by the total contract amount. $3,120,000/$ 10,400,000 × $16,000,000 = $4,800,000.