Gleason Construction enters into a long-term fixed price contract to build an office building for $27,000,000. In the first year of the contract Gleason incurs $5,000,000 of cost and the engineers determined that the remaining costs to complete the project are $24,000,000. How much gross profit or loss should Gleason recognize in Year 1 assuming the use of the percentage-of-completion method?
A) $2,000,000 profit
B) $2,000,000 loss
C) $0
D) $344,828 loss

Question

Quizplus · Accepted Answer

Gleason should recognize a $2,000,000 loss in Year 1 because the total estimated costs ($5,000,000 + $24,000,000 = $29,000,000) exceed the contract price ($27,000,000), resulting in a projected loss of $2,000,000.

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