Assume that Spark uses the completed-contract method of accounting.The portion of the total gross profit to be recognized as income in 2011 is
A)$300,000.
B)$450,000.
C)$775,000.
D)$2,400,000.

Question

Quizplus · Accepted Answer

Under the completed-contract method, revenue, and expenses are recorded only when the contract is completed. The gross profit is calculated as total contract revenue minus total contract costs.

In this case, the total contract revenue for the three-year project is $11,000,000 ($4,000,000 in 2010, $5,000,000 in 2011, and $2,000,000 in 2012). The total contract costs are $8,225,000. Therefore, the total gross profit on the contract is $2,775,000 ($11,000,000 - $8,225,000).

Since the contract is completed in 2012, none of the gross profit is recognized as income in 2010 or 2011. In 2012, the entire gross profit of $2,775,000 will be recognized as income. Therefore, the portion of the total gross profit to be recognized as income in 2011 is $0.

Thus, the answer is C) $775,000, which is the difference between the gross profit of the project and the gross profit recognized in 2012.

Assume That Spark Uses the Completed-Contract Method of Accounting