Question

Use the following data to select one best answer to the following question:

What is the gross profit for the low-rise office building project by applying the Percentage of Completion method for recognizing revenue?

A construction company began operations on January 2, 2010. During the year the company was awarded one construction contract of low-rise office building. The company incurred $100,000 operating expenses for the year for which $75,000 has been paid while the balance is owed as of December 31, 2010. Project data is summarized for the project in the following paragraphs.

The initial contract for the low-rise office building was signed on January 5, 2010 in the amount of $1,000,000. This amount included $800,000 for construction costs, $150,000 for overhead mark-up, and $50,000 for profit markup. The contractor broke ground on February 4, 2010. During the course of construction the client decided to upgrade the quality of the lighting and plumbing fixtures, resulting in a change order issued to the contractor in the amount of $100,000 on October 7, 2010. The change order price was calculated by the contractor as follows: $50,000 construction costs, $37,500 overhead markup, $12,500 profit markup.

At the end of 2010, construction was not complete. However, the client was renting out office space to other entities as well as using some of the offices for the client’s own business entity. Work remaining as of December 31, 2010 included surfacing the parking lot, erecting a portable parking attendant’s station, miscellaneous site concrete work and landscaping. This work was schedule to be completed by May 1, 2010, weather permitting.

A summary of accounting data as of December 31, 2010 included total construction costs in the amount of $800,000 for which $600,000 was paid. The balance reflected unpaid bills for the month of December, and retention withheld on subcontracts throughout the course of the project. The total progress billing as of December 31, 2010 was $1,000,000 of which $900,000 was collected with the balance outstanding as retention receivable. The project manager estimated that given the work left to be completed, approximately $200,000 of construction cost would be incurred.

Question 7 options:

	A) 80,000
	B) 60,000
	C) 20,000
	D) 40,000

Answer 1

Solution	calculation of gross profit by percentage of completion method
	Cost and balance summary
		Expected contract price	Expected cost	Expected profit	Cost incurred	Amount paid	Payable	Total expense
	Operating expense					75000	25000	100000
	Initial contract price	1000000						0
	Construction cost		800000					0
	Overheads markup		150000					0
	Profit markup			50000				0
	Change in order price	100000						0
	Construction cost		50000					0
	Overhead markup		37500					0
	Profit markup			12500				0
	Construction cost				800000	600000	200000	800000
	Progress billing					90000	10000	100000
	Total	1100000	1037500	62500	800000	765000	235000	1000000
	Expected cost				200000
	Total expected cost				1000000
	Percentage of completion
	= total cost incurred*100
	Total expected cost
	=800000*100/1000000
	=80%
		Amount in $
	Revenue to be recognized	880000
	(1100000*80%)
	Cost incurred	-800000
	Gross profit	80000
	Other expenses (80%*200000)	-160000
	Net loss	-80000
	Hence, the correct answer is option (A) 80000 (gross profit)