Question

During 2020, Pina Colada Corporation started a construction job with a contract price of $5.32 million. Pina Colada ran into severe technical difficulties during construction but managed to complete the job in 2022. The contract is non-cancellable. Under the terms of the contract, Pina Colada sends billings as revenues are earned. Billings are non-refundable. The following information is available: 2020 2021 2022 Costs incurred to date $ 760,000 $2,660,000 $5,220,000 Estimated costs to complete 3,990,000 2,660,000 -0-

(a) Calculate the amount of gross profit that should be recognized each year under the percentage-of-completion method. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) 2020 2021 2022 Gross profit / (loss)

Answer 1

Solution

	2020	2021	2022
Gross profit	$                   91,200	$           (91,200)	$                100,000

Working

		2020	2021	2022
A	Contract Price	$ 5,320,000	$ 5,320,000	$ 5,320,000
B	Cost Incurred to Date	$ 760,000	$ 2,660,000	$ 5,220,000
C	Estimated cost yet to be incurred to complete the contract	$ 3,990,000	$ 2,660,000	$ 0
D = B+C	Total Cost	$ 4,750,000	$ 5,320,000	$ 5,220,000
E = (D/B) x 100	% of Completion	16%	50%	100%
F = A x E	Revenue to date	$ 851,200	$ 2,660,000	$ 5,320,000
G	Revenue of Previous year	$ 0	$ 851,200	$ 2,660,000
H = F - G	Net Revenue this year	$ 851,200	$ 1,808,800	$ 2,660,000
I	Cost to date	$ 760,000	$ 2,660,000	$ 5,220,000
J	Cost to date of previous year	$ 0	$ 760,000	$ 2,660,000
K = I - J	Net Cost for the year	$ 760,000	$ 1,900,000	$ 2,560,000
L = H - K	Gross Profits	$ 91,200	-$ 91,200	$ 100,000