Question

Indiana Co. began a construction project in 2021 with a contract price of $163 million to be received when the project is completed in 2023. During 2021, Indiana incurred $39 million of costs and estimates an additional $81 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.

In 2022, Indiana incurred additional costs of $59 million and estimated an additional $36 million in costs to complete the project. Indiana (Do not round your percentage calculated):

Multiple Choice

• Recognized $4.00 million gross profit on the project in 2022.

• Recognized $27.50 million gross profit on the project in 2022.

• Recognized $7.23 million gross profit on the project in 2022.

• Recognized $29.00 million gross profit on the project in 2022.

Answer 1

Dear Friend,

We need to calculate this by following percentage of completion method year by year, so lets calculate total revenue we recognized in 2021:

Total Contract Value = $163 million

Cost incurred in 2021 = $39 million

cost to be incurred in future = $81 million

Total cost to complete the project = $120 million

Percentage of completion = 39/120 = 32.5%

Revenue recognized till 2021 = $163*32.5% = $52.975 million

Now, lets calculate total revenue we recognized in 2022:

Cost incurred in 2021 = $39 million

Cost incurred in 2022 = $59 million

Total cost incurred till date = 39+59 = $98 million

cost to be incurred in future = $36 million

Total cost to complete the project = $98+36 = $134 million

Percentage of completion = 98/134 = 73.13%

Revenue recognized till 2022 (including 2021) = $163*73.13% = $119.209 million

So, Revenue recognized only in 2022 = 119.209-52.975 = 66.234 million

Cost incurred in only 2022 = 59 million

Gross Profit in 2022 = 66.234-59 = 7.234 Millions (option C)