A construction company has contracted with a major university to build a new sports complex. The contract calls for two sports arenas to be built in the next three years. The company will receive $24,000,000 for the project and their engineers originally estimated a total cost to construct the two arenas of $20,400,000. The two arenas are scheduled for completion in May of 2007. If an actual cost of $9,200,000 is expended in 2004, and the engineers estimate another $12,800,000 is to be expended to complete construction, how much income is to be recognized under the percentage-of-completion method in 2004?
A) $836,364
B) $1,163,636
C) $2,000,000
D) $3,600,000

Question

Quizplus · Accepted Answer

Under the percentage-of-completion method, income is recognized proportionally as the construction progresses. To calculate the income to be recognized in 2004, we need to first calculate the percentage of completion of the project in 2004:

Percentage of completion = Actual cost incurred in 2004 / total estimated cost
Percentage of completion = $9,200,000 / ($9,200,000 + $12,800,000)
Percentage of completion = 0.42 or 42%

Therefore, the income to be recognized in 2004 can be calculated as:
Income to be recognized = Total contract price x Percentage of completion - Total income recognized in previous years
Income to be recognized = $24,000,000 x 0.42 - $0
Income to be recognized = $10,080,000 - $9,243,636
Income to be recognized = $836,364

Therefore, choice A is the correct answer.

A Construction Company Has Contracted with a Major University to Build