@gguzman.
Step 1 : Total contact price minus total estimated cost = GP.
Step2 : Compute % completion.
Cost incurrred till date /Total estimated cost.
In 00683 , 5400/16200 = 1/3
Step 3= GP X percent completed.
GP = 1800
So GP earned till date = 1800 X 1/3.
Step 4 (not in question ) = GP earned till date minus GP earned till previous year = GP earned in this year.
In this problem it is assumed ,it's first year or Zero profit earned in previous year.
Explanation : In problem you have to find out what will be total profit and in that process you have to know what will be total cost.So in problem normally they give this total estimated cost at the beginning of the contract then it's simple , you have total estimated cost available.
In most problems they will say , cost incurred till date $X and it is estimated that $Y will be estimated cost to completion.Here you have to add current cost with estimated cost to completion.
You need the total cost to get total Gross profit ,now note the wordings in two questions.
00689 : Mill
estimated that total cost
would amount to $16 M “over the period of construction” ( Total cost available ).
00683 it says , cost incurred 54M and “Estimated cost to ( note to ) complete ” 10M
So you add the estimated cost to current cost to get total cost.
Problem 00689.
Step 1 = 20 – 16 = 4
Why you are not adding current cost ? Because total estimated cost of completion given (16M ) in problem.
Step 2 = percent = 2/16.
Step 3 = 4 X 1/8
Progress Billing and collection are distraction ,this will only useful if they ask what would be current asset or liabilities to be shown in BS.In that case Billings – cost = Liabilities or Cost – Billings = assets.
I hope I clarified the confusion.
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