Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method. In 2017, the company entered into a contract to construct a building for $900,000. Camelia estimated that the cost of constructing the building would be $600,000. In 2017, the company incurred $150,000 in costs under the contract. In 2018, the company incurred an additional $500,000 in costs to complete the contract. The company's marginal tax rate in all years was 35%.

Question

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Under the percentage of completion method, the amount of revenue and expense recognized in each year is based on the percentage of total costs incurred to date relative to total estimated costs. In this case, total estimated costs are $600,000, and total costs incurred in 2017 and 2018 are $150,000 and $500,000, respectively, for a total of $650,000. Therefore, the percentage of completion at the end of 2017 is 25% ($650,000 / $600,000). Camelia must recognize revenue in the amount of 25% of the contract price, or $225,000 (25% x $900,000), and deduct the expenses incurred in the same proportion, or $150,000 (25% x $600,000). This results in a net income of $75,000 ($225,000 - $150,000) recognized in 2017.

Camelia Company Is a Large Commercial Real Estate Contractor That