Beaver Builders, Ltd.is using the completed-contract method for a $4,100,000 contract that will take two years to complete.Data at December 31, 2010, the end of the first year, are: The gross profit or loss that should be recognized for 2010 under the earnings approach is
A)$0.
B)a $50,000 loss
C)a $50,000 gross profit
D)a $100,000 gross profit

Question

Beaver Builders, Ltd.is using the completed-contract method for a $4,100,000 contract that will take two years to complete.Data at December 31, 2010, the end of the first year, are:  The gross profit or loss that should be recognized for 2010 under the earnings approach is
A)$0. 
B)a $50,000 loss 
C)a $50,000 gross profit 
D)a $100,000 gross profit

Quizplus · Accepted Answer

Under the earnings approach, the gross profit is recognized each year as incurred. At the end of the first year, the total cost incurred is $2,300,000 ($1,900,000 + $400,000). Therefore, the estimated total cost for the project is $4,600,000 ($2,300,000 x 2). The revenue recognized in the first year is $2,050,000 ($4,100,000 x 50%). Therefore, the gross profit to be recognized in the first year is $750,000 ($2,050,000 - $1,300,000). This translates to a gross profit of $50,000 ($750,000 / 15) for the first year.