Nova Construction Company (NCC)entered into a contract to build a school for $1,800,000. Construction commenced on May 1, 2020, with a planned completion date of December 31, 2022. A summary of the related accounting information is provided below: $$\begin{array} { | l | r | r | r | }
\hline & \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } & \mathbf { 2 0 2 2 } \
\hline \text { Costs incurred during the year } & 400,000 & 500,000 & 650,000 \
\hline \text { Estimated costs to complete at year end } & 1,200,000 & 600,000 & 0 \
\hline \text { Billings during the year } & 560,000 & 640,000 & 600,000 \
\hline \text { Cash collections during the year } & 500,000 & 310,000 & 990,000 \
\hline
\end{array}$$ How much gross profit would be recognized in fiscal 2020 if NCC uses the percentage of completion method?
A)$50,000
B)$100,000
C)$130,000
D)$180,000

Question

Nova Construction Company (NCC)entered into a contract to build a school for $1,800,000. Construction commenced on May 1, 2020, with a planned completion date of December 31, 2022. A summary of the related accounting information is provided below: $$\begin{array} { | l | r | r | r | } 
\hline & \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } & \mathbf { 2 0 2 2 } \
\hline \text { Costs incurred during the year } & 400,000 & 500,000 & 650,000 \
\hline \text { Estimated costs to complete at year end } & 1,200,000 & 600,000 & 0 \
\hline \text { Billings during the year } & 560,000 & 640,000 & 600,000 \
\hline \text { Cash collections during the year } & 500,000 & 310,000 & 990,000 \
\hline
\end{array}$$ How much gross profit would be recognized in fiscal 2020 if NCC uses the percentage of completion method?
A)$50,000
B)$100,000
C)$130,000
D)$180,000

Quizplus · Accepted Answer

Percentage of completion method recognizes gross profit based on the percentage of completion at the end of each period. Gross profit = (Percentage of completion * Total gross profit)Percentage of completion = (Costs incurred to date / Total estimated costs)Total gross profit = (Contract price - Total estimated costs)In 2020, the percentage of completion is 400,000 / (400,000 + 1,200,000) = 25%.Total gross profit = 1,800,000 - (400,000 + 1,200,000) = 200,000Gross profit recognized in 2020 = 25% * 200,000 = $50,000

Nova Construction Company (NCC)entered into a Contract to Build a School