ExpertHard1 markMultiple Choice
CPA · Question 39 · Area III: Select Transactions
On January 1, Year 1, Contractor Co. enters a contract to build a bridge for $10,000,000. The estimated cost is $8,000,000. <br/>Year 1 Actual Costs: $2,000,000. <br/>Year 1 Billings: $1,800,000. <br/>Year 1 Cash Collected: $1,500,000. <br/>Using the percentage-of-completion (input) method, what is the Current Asset (Contract Asset) or Current Liability (Contract Liability) reported at year-end?
On January 1, Year 1, Contractor Co. enters a contract to build a bridge for $10,000,000. The estimated cost is $8,000,000. <br/>Year 1 Actual Costs: $2,000,000. <br/>Year 1 Billings: $1,800,000. <br/>Year 1 Cash Collected: $1,500,000. <br/>Using the percentage-of-completion (input) method, what is the Current Asset (Contract Asset) or Current Liability (Contract Liability) reported at year-end?
Answer options:
A.
Contract Asset $500,000
B.
Contract Asset $700,000
C.
Contract Liability $200,000
D.
Contract Asset $200,000
How to approach this question
Net Position = (Cumulative Costs + Cumulative Gross Profit) - Cumulative Billings. <br/>If Positive -> Contract Asset (CIP > Billings). <br/>If Negative -> Contract Liability (Billings > CIP).
Full Answer
B.Contract Asset $700,000✓ Correct
B
1. Percent Complete = $2,000,000 / $8,000,000 = 25%.<br/>2. Revenue Recognized = $10,000,000 × 25% = $2,500,000.<br/>3. Construction in Progress (CIP) account balance = Costs Incurred ($2,000,000) + Gross Profit Recognized ($500,000) = $2,500,000.<br/>4. Compare CIP ($2,500,000) to Billings ($1,800,000).<br/>5. Net Asset = $700,000.
Common mistakes
Comparing Costs to Billings (ignoring profit). Comparing Revenue to Cash Collected.
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