Question

In: Accounting

Madoff Construction Company uses the percentage of completion method (cost to cost method) for their long...

Madoff Construction Company uses the percentage of completion method (cost to cost method) for their long term construction contracts.....

They were working on a contract for which they would receive $900,000 at completion....

In 2024, they reported a gross profit of 58,440.....

2025 was a disastrous year for the company. As of the end of the year, they had incurred costs of $800,000 (which includes costs for both 2024 and 2025) , and think it is going to cost 120,266 to finish the project.

How much of a loss should they report in 2025? (Enter the loss as a positive number...Example: loss of "150,000".)

Expert Solution

The percentage-of-completion method attempts to recognize revenues and gross profit in the applicable periods of construction, and not soley in the period when the construction has been completed, as in the completed contract method. The degree of completion of the construction, i.e., the percentage-of-completion, is typically estimated by dividing the total construction costs incurred to date by the total estimated costs of the contract, or job.

Recognition of expected losses - When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately.

The amount of such a loss is determined irrespective of: (a) whether or not work has commenced on the contract; (b) the stage of completion of contract activity; or (c) the amount of profits expected to arise on other contracts which are not treated as a single construction contract..

we are aware that this project is going to incurr the losses due to the disasterous 2025 year

Lets calculate the total cost incurred and total cost will be incurred in future.

A. Total cost incurred in 2024 and 2025 = $800,000

B. Expected cost to be incurred to finish the project = $120,266

C.Total cost incurred and to be incurred for the project = A + B = 800,000 + 120,266 = $ 920,266

D. Total revenue revenue = $ 900,00

Total loss to be recognised in 2025 = Total Revenue (D) - Total cost incurred (A)- Total cost expected to be incurred (B)

=$ 900,000-800,000-120,266

= -$20,266

Hence the Madoff Construction Company should report loss of $ 20,266 in 2025

Note - Gross profit of 58,440 in 2024 has been given in question just to confuse the student. You should ignore it in this question and solve question based on recognition of expected losses principle mentioned above.

ekkarill92 answered 1 year ago

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