Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2012, 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 2012, the company incurred $240,000 in costs under the contract.In 2013, 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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Camelia Company must report gross profit in 2012 using the percentage of completion method (total costs incurred to date / total estimated costs x contract price). Therefore, the company must report $80,000 gross profit in 2012 ($240,000 / $720,000 x $960,000). However, under the lookback rules, the company may have to pay interest in 2013 on the tax liability from the reported income in 2012. The company does recognize additional profit in 2013, but it must also recognize the corresponding tax liability. Therefore, options A, C, and D are incorrect.

Camelia Company Is a Large Commercial Real Estate Contractor That