[IGOTTHEKEYS]

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.