A construction company uses the percentage-of-completion method of accounting. In 2007, the company began work on a government contract which had a contract price of $4,000,000 and estimated costs of $3,000,000. Additional data were as follows: $\begin{array}{|l|l|l|}
\hline & \mathbf{2 0 0 7} & \mathbf{2 0 0 8} \
\hline \text { Costs incurred during the year } & \$ 600,000 & \$ 2,550,000 \
\hline \text { Estimated costs to complete, as of } 12 / 31 / 2007 & 2,400,000 & \
\hline \text { Billing during the year } & 720,000 & 3,080,000 \
\hline \text { Collections during the year } & 500,000 & 3,100,000 \
\hline
\end{array}$ The portion of the total contract income to be recognized during 2007 is:
A) $120,000
B) $200,000
C) $250,000
D) $1,000,000

Question

Quizplus · Accepted Answer

The portion of the total contract income to be recognized in 2007 is calculated using the percentage-of-completion method. This method recognizes income based on the percentage of the project completed during the year. The percentage of completion is calculated as the costs incurred to date divided by the total estimated costs. For 2007, the costs incurred are $600,000 and the total estimated costs were initially $3,000,000 but were updated to $3,150,000 ($600,000 for 2007 plus the estimated $2,550,000 to complete). The percentage of completion for 2007 is $600,000 / $3,150,000 = 0.1905 or 19.05%. The total contract income is the contract price minus the total estimated costs, which is $4,000,000 - $3,000,000 = $1,000,000. Therefore, the income to be recognized in 2007 is 19.05% of $1,000,000, which is $190,476.19, rounded to the nearest option, which is $200,000.

A Construction Company Uses the Percentage-Of-Completion Method of Accounting The Portion of the Total Contract Income to Be Recognized