Question:
A construction company entered into a fixed-price contract to build an office building for $20 million.
Construction costs incurred during the first year were $6 million and estimated costs to complete at the
end of the year were $9 million. How much gross profit will the company recognize in the first year using
the percentage-ofcompletion method? How much revenue will appear in the company’s income
statement?
Answer:
Total estimated cost to complete = $6 million + 9 million = $15 million
% of completion = $6 million $15 million = 40%
Total estimated gross profit ($20 million – 15 million) = $5,000,000
multiplied by the % of completion 40%
Gross profit recognized the first year $2,000,000
First year revenue = $20,000,000 x 40% = $8,000,000
A construction company entered into a fixed-price contract to build an office building for $20 million.
Construction costs incurred during the first year were $6 million and estimated costs to complete at the
end of the year were $9 million. How much gross profit will the company recognize in the first year using
the percentage-ofcompletion method? How much revenue will appear in the company’s income
statement?
Answer:
Total estimated cost to complete = $6 million + 9 million = $15 million
% of completion = $6 million $15 million = 40%
Total estimated gross profit ($20 million – 15 million) = $5,000,000
multiplied by the % of completion 40%
Gross profit recognized the first year $2,000,000
First year revenue = $20,000,000 x 40% = $8,000,000
