Use the following information for questions:
Streetside Construction agreed to build a shopping centre for $25,000,000 over the next four years.Estimated cost for years one through four are: $7,500,000; $5,000,000; $5,000,000; and $2,500,000.
-Assume total estimated costs to complete the job at the beginning of year three were revised to $27,000,000.Under the percentage of completion method, the loss for year three would be:
A)$3,125,000)
B)$2,000,000)
C)$7,000,000)
D)$5,125,000)

Question

Quizplus · Accepted Answer

At the beginning of year three, the total estimated costs were revised to $27,000,000. By the end of year two, $12,500,000 ($7,500,000 + $5,000,000) had already been spent, leaving an estimated $14,500,000 ($27,000,000 - $12,500,000) to complete the project. The original contract was for $25,000,000, so the project is now expected to result in a loss of $2,000,000 ($27,000,000 - $25,000,000). By the end of year two, 46.3% of the work (based on the original estimate) was completed ($12,500,000 of $27,000,000). The loss recognized in year three is the total expected loss ($2,000,000) minus the loss recognized in previous years (0, since the loss was only identified in year three), which equals $2,000,000. However, the calculation for the percentage of completion method also involves recognizing revenue and costs proportionate to the completion level. The error in the initial explanation is in not properly applying the percentage of completion method to calculate the loss for year three, which involves recognizing the proportion of the loss based on the work completed up to that point, including adjustments for the revised estimates. The correct calculation should factor in the revenue and costs recognized up to year three, including the adjustment for the revised total cost, to determine the loss specifically attributable to year three.

Use the Following Information for Questions