Gleason Construction enters into a long-term fixed price contract to build an office building for $26,000,000. In the first year of the contract, Gleason incurs $6,000,000 of cost and the engineers determined that the remaining costs to complete are $14,000,000. How much revenue should Gleason recognize in Year 1 assuming the use of the zero-gross -profit approach?
A) $6,000,000
B) $26,000,000
C) $0
D) $14,000,000

Question

Quizplus · Accepted Answer

Under the zero-gross-profit approach, revenue is recognized in proportion to costs incurred. In the first year, Gleason incurs $6,000,000 of cost and the remaining costs to complete are $14,000,000. Therefore, the total cost of the contract is $20,000,000 ($6,000,000 + $14,000,000). The percentage of completion in the first year is $6,000,000 / $20,000,000 = 30%. Therefore, Gleason should recognize revenue of $26,000,000 x 30% = $6,000,000 in Year 1.

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