I'm badly stuck on a Percent of Completion question in a Beckers progress test. Hoping someone can see what I'm not seeing. My question is actually in the computation. I can't figure out how they got the Cumulative Gross Profit Recognized (scroll down to the answer, in the year 1 and year 2 computations, they show 800,000 in the first year and 1,800,000 in the second year). Can anyone explain how to compute those?
Here's the question: (from section F2)
Sonex Construction Co. incurred the following costs and made the following estimates in the first two years of a three-year construction project.
Actual current year costs incurred Yr 1: $ 1,200,000 Yr. 2: 1,000,000
Estimated costs to complete contract Yr 1: 1,800,000 Yr. 2: 550,000
Contract price: 5,000,000
Billings and collections Yr. 1: 2,500,000 Yr. 2: 1,500,000
Using the percentage of completion method of accounting, what amount would Sonex show as either a net current asset or a net current liability as of the end of Year 2 due to its construction activity?
a. $0
b. $4,000,000 asset.
c. $1,500,000 liability.
d. $1,800,000 asset.
Answer: Choice “a” is correct. If the sum of cumulative costs incurred plus cumulative gross profit recognized exceeds cumulative billings, the excess is reported as a current asset. If cumulative billings exceeds the sum of cumulative costs incurred plus cumulative gross profit recognized, the difference is reported as a current liability. If the two amounts are equal, no asset or liability is recognized.
Cumulative Costs Incurred + Cumulative Gross Profit R'cgz – Cumulative Billings:
Year 1 End:
1,200,000 + 800,000 – 2,500,000 = (500,000)
Year 2 End:
2,200,000 + 1,800,000 – 4,000,000 = 0
REG - Nov 4, 2013: 88
FAR - Feb 27, 2014: 86
AUD - April 5, 2014: 91
BEC - May 6, 2014: 83
Florida CPA 24 July 2014
(Done in seven months - thank you Jesus!!)
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