How much gross profit will the company recognize in the first year using the percentage-of-completion method? How much revenue will appear in the company's income statement?

A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to complete at the end of the year were $9 million. How much gross profit will the company recognize in the first year using the percentage-of-completion method? How much revenue will appear in the company's income statement?

Expert Solution

Step 1.

Total estimated cost to complete = $6 million + $9 million = $15 million

Step 2.

% of completion = $6 million ÷ $15 million = 40%

Step 3.

Total estimated gross profit ($20 million - 15 million) = $5,000,000

multiplied by the % of completion 40%

Gross profit recognized the first year $2,000,000

First year revenue = $20,000,000 x 40% = $8,000,000

The gross profit recognized in the first year is $2,000,000. The first-year revenue will be $8,000,000.

Renze Joy Candido answered 2 years ago

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