ExpertMedium1 markMultiple Choice
CPA · Question 30 · Area III: Select Transactions
A company uses the percentage-of-completion method (cost-to-cost) for a long-term construction contract. <br/>Contract Price: $1,000,000.<br/>Year 1 Data:<br/>- Costs incurred: $200,000<br/>- Estimated costs to complete: $600,000<br/>- Billings: $150,000<br/>- Collections: $100,000<br/><br/>What is the Gross Profit recognized in Year 1?
A company uses the percentage-of-completion method (cost-to-cost) for a long-term construction contract. <br/>Contract Price: $1,000,000.<br/>Year 1 Data:<br/>- Costs incurred: $200,000<br/>- Estimated costs to complete: $600,000<br/>- Billings: $150,000<br/>- Collections: $100,000<br/><br/>What is the Gross Profit recognized in Year 1?
Answer options:
A.
$50,000
B.
$200,000
C.
$250,000
D.
$0
How to approach this question
1. Calculate % Complete = Incurred / (Incurred + Estimated Remaining). 2. Calculate Total Expected Profit = Price - Total Estimated Cost. 3. Profit to Date = % * Total Profit. 4. Subtract prior years (if any).
Full Answer
A.$50,000✓ Correct
1. **Total Cost:** $200,000 + $600,000 = $800,000.<br/>2. **Total Expected Profit:** $1,000,000 - $800,000 = $200,000.<br/>3. **% Complete:** $200,000 / $800,000 = 25%.<br/>4. **Profit to Date:** 25% * $200,000 = $50,000.
Common mistakes
Using billings instead of costs for % completion.
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