HitMi thanks for your reply on page 10.
I actually have another question:
Frame construction company's contract requires the construction of a bridge in three years. The expected total cost of the bridge is $2,000,000, and Frame will receive $2,500,000 for the project. The actual costs incurred to complete the project were $500,000, $900,000, and $600,000, respectively, during each of the three years. Progress payments received by Frame were $600,000, $1,200,000, and $700,000, respectively. Assuming that the percentage-of-completion method is used, what amount of gross profit would Frame report during the last year of the project?
a.
$120,000
b.
$125,000
c.
$140,000
d.
$150,000
Explanation
Choice “d” is correct. The expected gross profit from this contract is $500,000 ($2,500,000 sales price − $2,000,000 anticipated costs). The actual project costs are $2,000,000 ($500,000 + $900,000 + $600,000).
In the first year, the percentage of completion was 25% ($500,000 / $2,000,000), so gross profit of $125,000 (25% x $500,000) was recognized.
In the second year, the percentage of completion was 70% [($500,000 + $900,000) / $2,000,000], so cumulative gross profit was $350,000.
Finally, in the third year, the project was completed, so the remaining 30% of the profit is recognized: $500,000 x 30% = $150,000.
Choices “a”, “b”, and “c” are incorrect as per the explanation above.
I linda get the answer, but what I don't understand is: If in year one we recognize 125k, year 2 we recognize $350k, then how in year 3 we can recognize $150k if our total profit from the project for all three years is $2,500-$2,000 = 500k? 125+350+150 is 625. Thoughts?
Bec - 74; 81
Reg - 76
Far - study now
Aud - later
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