FAR MCQ Clarification

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    Topic
  • #1600703
    IGOTTHEKEYS
    Participant

    Gow Constructors, Inc. has consistently used the percentage­of­completion method of recognizing
    income. In Year 1, Gow started work on an $18,000,000 construction contract that was completed in Year
    2. The following information was taken from Gow’s Year 1 accounting records:
    Progress billings 6,600,000
    Costs incurred 5,400,000
    Collections 4,200,000
    Estimated costs to complete 10,800,000
    What amount of gross profit should Gow have recognized in Year 1 on this contract?
    A. $1,400,000
    B. $1,200,000
    C. $900,000
    D. $600,000

    Explanation
    Choice “D” is correct. $600,000 gross profit recognized in Year 1.
    Step 1 ­ compute G/P of total contract
    Total contract sales price $18,000
    Less total estimated costs 16,200
    Total gross profit $1,800
    Step 2 ­ compute % of completion Thousands
    Costs incurred (to date) $5,400 = 1/3 CMP
    Estimated cost to complete 10,800 = 2/3
    Total estimated costs $16,200 = 100%
    Step 3 ­ compute G/P earned to date
    Total contract gross profit $1,800
    x % of completion 1/3
    G/P earned to date $600

    My Question is, when do you use the estimated plus the incurred cost to calculate gross profit.
    As i am doing the progress test, there are many MCQ that use the estimated cost only to calculate gross profit and other use the estimated plus incurred cost to calculate gross profit? Which do i ultimately use, (BTW this is a becker MCQ)

    Second Question, When calculating the percentage of completion %, do i use the Actual cost divided by the (Estimated + Actual Cost), or do i just simply use the Actual Cost Divided by Estimated Cost. The book shows Actual Cost Divided by Estimated Cost, but the MCQ shows both in different problems. Just want to have a clear understanding, hitting the review phase hard this week.

    Thanks.

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