Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method. In 2018, 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 2018, the company incurred $150,000 in costs under the contract. In 2019, the company incurred an additional $500,000 in costs to complete the contract.

Question

Quizplus · Accepted Answer

Under the percentage of completion method, income is recognized proportionally as the work is completed. In 2018, Camelia incurred $150,000 in costs and estimated that the total cost would be $600,000, therefore the percentage of completion is ($150,000 ÷ $600,000) = 25%. This means that Camelia must recognize 25% of the total estimated profit of $300,000 ($900,000 contract price - $600,000 estimated cost) in 2018, which is $75,000.

Camelia Company Is a Large Commercial Real Estate Contractor That