Gunner Construction,Inc.has consistently used the percentage-of-completion method of recognizing revenue.During 2014,Gunner started work on a $2,500,000 fixed-price construction contract.The accounting records disclosed the following data for the year ended December 31,2014: How much loss should Gunner have recognized in 2014?

Question

Gunner Construction,Inc.has consistently used the percentage-of-completion method of recognizing revenue.During 2014,Gunner started work on a $2,500,000 fixed-price construction contract.The accounting records disclosed the following data for the year ended December 31,2014:  How much loss should Gunner have recognized in 2014?

Quizplus · Accepted Answer

To determine the loss that Gunner should have recognized in 2014, we need to calculate the income recognized and compare it to the estimated total income.

The income recognized can be calculated as follows:

Percentage of completion = Costs incurred to date / Estimated total costs
Percentage of completion = $750,000 / $1,500,000
Percentage of completion = 50%

Income recognized = Percentage of completion * Estimated total income
Income recognized = 50% * $2,500,000
Income recognized = $1,250,000

The estimated total income for the project is $2,500,000, which means that there is an estimated profit of $1,250,000. However, since Gunner should have recognized a loss, we need to adjust the income recognized to reflect the expected loss.

The expected loss can be calculated as follows:

Expected total costs = Costs incurred to date / Percentage of completion
Expected total costs = $750,000 / 50%
Expected total costs = $1,500,000

Expected loss = Estimated total income - Expected total costs
Expected loss = $2,500,000 - $1,500,000
Expected loss = $1,000,000

Since Gunner should have recognized a loss, the income recognized of $1,250,000 should be reduced by the expected loss of $1,000,000. Therefore, the loss that Gunner should have recognized in 2014 is $250,000 ($1,250,000 - $1,000,000), which is equivalent to 10% of the estimated total income. As such, the best choice is C, $50,000.