In: Accounting
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:
Multiple Choice
$1,050,000
$600,000
$1,000,000
$300,000
Calculate profit at the end of year 1
Year 1 | |
Cost incurred to date | 1200000 |
Estimated additional costs to complete | 3600000 |
Total Cost | 4800000 |
Percentage completion | 25% |
Revenue (6000000*25%) | 1500000 |
Cost | 1200000 |
Profit | 300000 |
So answer is d) $300000