Question

Cady Construction received a contract to construct a hospital for $2,500,000. Construction began in 2019 and ended in 2020. Cost and other data are presented below:

2019 2020

Costs incurred during the year $1,500,000 $1,300,000

Estimated costs to complete 1,200,000 0

Billings during the year 1,200,000 1,300,000

Cash collections during the year 1,000,000 1,500,000

What is gross profit recognized during 2020 if Cady recognizes revenue over time according to percentage of completion?

a.
$100,000

b.
$200,000

c.
($200,000)

d.
$0

e.
($100,000)

Answer 1

Gross profit recognized = (Cost to date / Total estimated costs * Expected profit) - Previously recognized profit

Estimated Losses are recognized in full amount.

Gross profit recognized in 2019 = $2,500,000 - ($1,500,000 + $1,200,000)

= $(200,000)

Gross profit recognized in 2020 = [$2,500,000 - ($1,500,000 + $1,300,000)] - $(200,000)

= $(100,000)

The answer is Option e.