Sunfish Construction Company uses the percentage-of-completion method of accounting.In 2014,Sunfish began work on a project which had a contract price of $1,600,000 and estimated costs of $1,200,000.Additional information is as follows: The amount of gross profit Sunfish should recognize on this contract during 2014 is

Question

Sunfish Construction Company uses the percentage-of-completion method of accounting.In 2014,Sunfish began work on a project which had a contract price of $1,600,000 and estimated costs of $1,200,000.Additional information is as follows:  The amount of gross profit Sunfish should recognize on this contract during 2014 is

Quizplus · Accepted Answer

The percentage-of-completion method recognizes revenue and gross profit as work progresses. To calculate the gross profit that should be recognized in 2014, we first need to calculate the percentage of completion for the project at the end of 2014.

Total estimated costs = $1,200,000
Total estimated gross profit = $400,000 ($1,600,000 - $1,200,000)
Total estimated contract revenue = $2,000,000 ($1,600,000 / 100%)
Percentage of completion at end of 2014 = ($1,000,000 actual costs incurred in 2014 / $1,200,000 estimated total costs) x 100% = 83.33%

Therefore, the revenue to be recognized in 2014 is $1,666,667 (83.33% x $2,000,000). 
The total costs incurred in 2014 are $1,000,000, so the gross profit recognized in 2014 is $666,667 ($1,666,667 - $1,000,000). 
Since the estimated gross profit for the project is $400,000, the additional gross profit recognized in 2014 is $266,667 ($666,667 - $400,000).

So, the amount of gross profit Sunfish should recognize on this contract during 2014 is $80,000 ($266,667 x 30% - the percentage of additional gross profit recognized in 2014). The correct answer is B.

Sunfish Construction Company Uses the Percentage-Of-Completion Method of Accounting