Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2011,the company entered into a contract to construct a building for $960,000.Camelia estimated that the cost of constructing the building would be $720,000.In 2011,the company incurred $240,000 in costs under the contract.In 2012,the company incurred an additional $450,000 in costs to complete the contract.The company's marginal tax rate in all years was 35%.

Question

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According to the percentage of completion method, Camelia must recognize income and gross profit in proportion to the costs incurred. In 2011, Camelia incurred $240,000 in costs, which is 33.33% of the estimated total costs of $720,000. Therefore, Camelia must recognize 33.33% of the contract revenue, which is $320,000 and subtract the actual costs incurred, which is $240,000, resulting in a gross profit of $80,000 in 2011. However, since Camelia has not completed the contract in 2011, it must pay interest under the lookback rules in 2012. Camelia cannot recognize any profit in 2012 because it has already recognized the entire contract revenue and gross profit in 2011. Therefore, choices A, C, and D are incorrect.

Camelia Company Is a Large Commercial Real Estate Contractor That