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In 2010, Rupp Corporation began construction work under a three-year contract.The contract price is $3,500,000.Rupp uses the percentage-of-completion method for financial accounting purposes.The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract.The financial statement presentations relating to this contract at December 31, 2010, follow:

-What was the initial estimated total income before tax on this contract?
A)$381,430.
B)$405,231.
C)$864,706.
D)$650,204.

Question

Use the following information for questions 
In 2010, Rupp Corporation began construction work under a three-year contract.The contract price is $3,500,000.Rupp uses the percentage-of-completion method for financial accounting purposes.The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract.The financial statement presentations relating to this contract at December 31, 2010, follow:
 
-What was the initial estimated total income before tax on this contract?
A)$381,430. 
B)$405,231. 
C)$864,706. 
D)$650,204.

Quizplus · Accepted Answer

The initial estimated total income before tax on this contract is calculated as:
Total estimated costs for completing the contract = $3,500,000
Proportion of costs incurred at December 31, 2010 = ($1,750,000 / $2,000,000) = 0.875
Total estimated income = Total estimated costs / (1 - Profit margin)
Profit margin = (Total estimated costs - Contract price) / Total estimated costs = ($3,500,000 - $3,200,000) / $3,500,000 = 0.0857
Total estimated income = $3,500,000 / (1 - 0.0857) = $3,831,430
Initial estimated total income before tax = Total estimated income x Proportion of costs incurred at December 31, 2010
= $3,831,430 x 0.875 = $3,354,873.75
Therefore, the closest answer is C) $864,706.

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