Gleason Construction enters into a long-term fixed price contract to build an office building for $30,000,000. In the first year of the contract Gleason incurs $8,000,000 of cost and the engineers determined that the remaining costs to complete are $12,000,000. How much gross profit or loss should Gleason recognize in Year 1 assuming the use of the percentage-of-completion method? (Round the gross profit percentage to 4 decimal places)
A) $22,000,000 profit
B) $18,000,000 loss
C) $4,000,000 profit
D) $12,000,000 loss

Question

Quizplus · Accepted Answer

Under the percentage-of-completion method, the percentage of completion is calculated as costs incurred to date divided by total estimated costs. Here, $8,000,000 / ($8,000,000 + $12,000,000) = 0.4 or 40%. The total contract revenue is $30,000,000, so the revenue recognized in Year 1 is 40% of $30,000,000, which is $12,000,000. The costs incurred are $8,000,000, so the gross profit recognized is $12,000,000 - $8,000,000 = $4,000,000.

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