Question

Red Builders agrees to construct a new building for Blue Co. for a total contract price of $6,000,000. The estimated construction costs at inception was $4,000,000. The construction project was completed after two years. Below are the actual costs for years 1 and 2:

Description Cumulative
Year 1 Year 2
Cost incurred to date 1,200,000 2,500,000
Estimated additional costs to complete 3,600,000 2,100,000
Billings 1,050,000 2,300,000
Cash Collections 1,000,000 1,900,000

Red has determined that this contract qualifies for revenue recognition over time (as opposed to upon completion). As a result, Red Builders should have recognized profit at the end of year 1 in the amount of:

a. $300,000
b. $600,000
c. $1,050,000
d. $1,000,000

Answer 1

Answer:

Gross Profit at the end of year 1 in the amount of $300,000

Explanation:

Computation of recognized profit at the end of year 1 :

Particular                                       year 1 amount

Cost incurred to date (1)                 $1,200,000

Estimated additional cost (2)          $3,600,000

Total Expected costs(1+2=3)           $4,800,000

Percentage completion [(1 / 3)=4]         0.25

Control price (revenue) (5)               $6,000,000

Profit (5-3=6)                                     $1,200,000

Cumulative Gross Profit (6x4)      $300,000

Gross Profit                                      $300,000