Question

1. In 20x1, Build Construction Corporation contracted to build a motel. The contract price is $600,000 and the total cost is estimated as $400,000. Over the construction period there has been no change in either the contract price or the estimated total cost. Costs incurred for 20x1 and 20x2 are $200,000 and $160,000, respectively. How much gross profit should be recognized in 20x1 under the percentage-of-completion method?

A) $80,000

B) $100,000

C) $120,000

D) $160,000

2.When using the percentage-of-completion method to account for a long term contract, the gross profit recognized in the first year of a three-year construction project generally is the estimate of total gross profit from the project multiplied by the ratio of:

A) Estimated costs to complete to estimated total costs.

B) Estimated costs to complete to actual costs incurred to date.

C) Estimated total costs to estimated costs to complete.

D) Actual costs incurred to date to estimated total costs.

3.Harry Retails Ltd. extends credit to its customers. Since uncollectible accounts are immaterial, management has decided to use the direct write-off method to account for bad debt expenses. Which of the following would be true?

A) Receivables likely will be overstated.

B) The matching principle is violated if the write-off occurs in the period the receivable is created.

C) The direct write-off method is more costly from an operational stand point.

D) All of the above are true.

Answer 1

1 Correct answer is B) $100,000

Gross profit recognised in year 20X1=Total gross profit*(Actual cost incurred to date/Total estimated cost)

Total gross profit of contract=Total contract price-Total estimated cost

=$600,000-$400,000

Total gross profit=$200,000

Cost incurred to date=$200,000

Gross profit recognised in year 20X1=$200,000*(200,000/400,000)

Gross profit recognised=$100,000

2 Correct answer is D) Actual costs incurred to date to estimated total costs.

Gross profit recoginsed in year 1=Gross profit from the project*(Actual cost incurred to date/Total estiamted cost)

As per percentage of completion method gross profit is to be recognised over the period of cost as the cost is incurred following the matching concept.Which states that revenue should be recorded to the extent cost recorded.So gross profit is recorded as percentage of cost incurred of the total estiamted cost.

3 Correct asnwer is A) Receivables likely will be overstated.

If the direct write off method is used no provision is amde for the baddebt of accounts receivable and net realizable value is overstated as in future accounts receivable could be writeen off and making the value of receivable in the present balancehseet overstated.

As per matching concept baddebt expense should be recorded through provision in which year the accounts receivable created so if the baddebt expenses is recorded in current year as customer account written off the amtching concept is followed and the statement is false as matching concept not violated.