Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2010,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 2010,the company incurred $240,000 in costs under the contract.In 2011,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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Under the percentage of completion method, Camelia must recognize gross profit based on the proportion of costs incurred to the estimated total cost of the contract. In 2010, Camelia incurred $240,000 in costs and estimated total costs to be $720,000, indicating that it is 33.33% complete ($240,000 ÷ $720,000). Therefore, Camelia must recognize gross profit of $320,000 ($960,000 contract price - $720,000 estimated total cost) multiplied by 33.33%, or $106,560. However, Camelia must also pay interest in 2011 under the lookback rules for the tax paid on the recognized gross profit in 2010. In 2011, Camelia incurred an additional $450,000 in costs and estimated total costs to be $720,000, indicating that it is 87.5% complete ($690,000 ÷ $720,000). Therefore, Camelia must recognize additional gross profit of $320,000 multiplied by 54.17% (87.5% - 33.33%), or $173,344. Camelia must also pay interest in 2012 under the lookback rules for the tax paid on the recognized gross profit in 2011.

Camelia Company Is a Large Commercial Real Estate Contractor That