[xpa17]

Hi ninjas,

Here again with another confusing %-of-completion questions. 🙂

Q1: Mill Construction Co. uses the percentage-of- completion method of accounting. During Year 1, Mill contracted to build an apartment complex for Drew for $20,000,000. Mill estimated that total costs would amount to $16,000,000 over the period of construction. In connection with this contract, Mill incurred $2,000,000 of construction costs during Year 1. Mill billed and collected $3,000,000 from Drew in Year 1. What amount should Mill recognize as gross profit for Year 1?”

The answer is $250,000 because of the following:
Total contract sales price = $20,000,000
Less total estimated cost of contract = $16,000,000
Total Gross Profit = $4,000,000
Cost incurred to date/total est. cost of contract = $2,000,000/$16,000,000 = 1/8
Gross profit recognized in YR 1 = $4,000,000 * 1/8 = $500,000

Q2: Haft Construction Co. has consistently used the percentage-of-completion method. On January 10, Year 1, Haft began work on a $3,000,000 construction contract. At the inception date, the estimated cost of construction was $2,250,000. The following data relate to the progress of the contract:
Income recognized at 12/31/Year 1 = $ 300,000
Costs incurred 1/10/ Year 1 through 12/31/Year 2 = $1,800,000
Estimated cost to complete at 12/31/Year 2 = $600,000
In its income statement for the year ended December 31, Year 2, what amount of gross profit should Haft report?

The answer is $150,000 because:
Contract price = $3,000,000
Total cost = $2,400,000 (1,800,000 + 600,000)
Expected gross profit 600,000
Cost incurred to date/total est. cost of contract = (18/24) = 75%
Profit to date $450,000
Profit previously recognized (300,000)
Year 2 profit $ 150,000

———–> Why is Q1’s total cost not $18,000,000 like the way we did in Q2? I read the similar posts in the forum, but I am still confused of exactly when to combine the cost of estimated cost and actual incurred cost.

Any help is greatly appreciated!!

[Anonymous]

Q1 shows actual cost incurred. There is no mention of changes in the total cost. Q2 says that the total cost changed because it shows cost incurred + the estimated cost to complete is more than initially planned.

Hope this helps.

[Author]

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