Gleason Construction enters into a long-term fixed price contract to build an office building for $27,000,000. In the first year of the contract Gleason incurs $8,000,000 of cost and the engineers determined that the remaining costs to complete are $25,000,000. How much gross profit or loss should Gleason recognize in Year 1 assuming the use of the completed-contract method?
A) $6,000,000 loss
B) $6,000,000 profit
C) $0
D) $19,000,000 loss

Question

Quizplus · Accepted Answer

Under the completed-contract method, revenue and expenses are recognized only when the contract is completed. However, if a loss is expected, it must be recognized immediately. The total estimated cost is $33,000,000 ($8,000,000 incurred + $25,000,000 remaining), which exceeds the contract price of $27,000,000, resulting in an expected loss of $6,000,000.

Gleason Construction Enters into a Long-Term Fixed Price Contract to Build