Question

1. ABC expends $500,000 for work performed under a contract with a total contract price of $3 million and estimated costs of $2.5 million. It sends a bill to the customer for $400,000 under the terms of the contract.

a. How much revenue and gross profit should the company recognize in the income statement?

b. How is the $400,000 billing reported on the balance sheet?

Answer 1

Percentage of completion is used:
1	Total Contract price		$    3,000,000
	Cost incurred	500,000
	Add: estimated cost to be incurred	2,000,000	2,500,000
	Estimated Gross Profit		500,000
	x percentage complete		x 20%*
	Gross profit to be recognized		$        100,000
	*500000÷ 2500000 = 20%
	Revenue to be recognized =	3000000 x 20% = 600,000
2	Billing to be reported in balance sheet
	Current assets
	Accounts receivable		$        400,000
	Inventory
	Construction in process	$            600,000
	Less: billing	400,000
	cost and recognized profit in excess of billings		200,000