can some explain this? If actual costs at the end of year 3 equaled $2.1M then why would you recognize the $150k and not reduce it to 50K..The answer says you would recognize the entire 500k throughout the 3 years,,meanwhile your GP was reduced to 400k…dont get this one especially when receipts only total the original contract price…unless they assumed that they would bill for another 100k? i know if you looked at it str8 without adding up total actual costs at the end of the contract you would get the 150k in year 3 but if you look you only make 400k and recognized 500k…so what happens to the other 100k? i got it correct however if there was an answer choice of 50k i would have gotten it incorrect.
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?
$125,000
$140,000
$120,000
$150,000 correct
Correct! The percentage-of-completion method recognizes revenues based on the percentage of costs incurred to total estimated costs. At the end of year 3 total estimated costs are equal to total actual costs. 70% of gross profit had been recognized at the end of year 2 ($900,000+$500,000/ $2,000,000)=70% and the remaining 30% is recognized at the end of year 3 ($600,000/$2,000,000)=30%. Total gross profit is equal to $500,000 ($2,500,000-$2,000,000) so Frame would report $150,000 in gross profit for year 3 (30% * $500,000) = $150,000.
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