Question

On April 1, 2020, Larkspur Inc. entered into a cost plus fixed fee non-cancellable contract to construct an electric generator for Blue Spruce Corporation. At the contract date, Larkspur estimated that it would take two years to complete the project at a cost of $2,440,000. The fixed fee stipulated in the contract was $549,000. Larkspur appropriately accounts for this contract under the percentage-of-completion method. During 2020, Larkspur incurred costs of $976,000 related to this project. The estimated cost at December 31, 2020, to complete the contract is $1,464,000. Blue Spruce was billed $732,000 under the contract. The billings are non-refundable.

(a)

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Calculate the amount of gross profit to be recognized by Larkspur under the contract for the year ended December 31, 2020. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Gross profit / (loss)

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(b)

Show how the contract will be reported on the income statement for the year ended December 31, 2020. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

LARKSPUR INC. Partial Income Statement                                                                       Quarter Ended December 31, 2020Year Ended December 31, 2020Month Ended December 31, 2020
		$
select a summarizing line for the first part                                                                      ExpensesNet Income / (Loss)Total RevenuesGross Profit / (Loss)Total ExpensesRevenuesOther Expenses and LossesOperating ExpensesIncome from OperationsDividends		$

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Answer 1

ANSWER

A)

Contract price [$2,440,000+ $549,000]	$2,989,000
Cost to date	$976,000
Estimated cost	$1,464,000
Total estimated cost	$2,440,000
Estimated gross profit	$549,000
[$2,989,000- $2,440,000]
Percentage of completion [$2,440,000 * 0.40]	$976,000

                                                                                   

Gross profit recognized 2020           40% of $549,000 = $219,600

Gross Profit recognized in 2020 = $219,600

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