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Dudeck Construction Co.agreed to build a bridge for Genoa City.The contract specifies that construction will take three years and Dudeck will receive $12,500,000.The company expects annual costs to be $3,500,000; $2,750,000; and $1,800,000.
-Assume Dudeck uses the percentage of completion method.Profits for year one will be:
A)$ -0-
B)$ 1,483,333
C)$1,934,783
D)$ 4,450,000

Question

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The percentage of completion method recognizes revenue and profits based on the progress of the construction project. To calculate the profit for year one, first determine the total expected profit from the project: $12,500,000 (total contract value) - ($3,500,000 + $2,750,000 + $1,800,000) (total costs) = $4,450,000 (total expected profit). Next, calculate the percentage of completion for year one: $3,500,000 (year one costs) / ($3,500,000 + $2,750,000 + $1,800,000) (total costs) = 41.67%. Then, apply this percentage to the total expected profit: 41.67% * $4,450,000 = $1,854,167. However, the correct calculation for the profit should consider the revenue recognized for the year, not just the profit percentage. The revenue recognized for year one is based on the percentage of costs incurred: $3,500,000 / $8,050,000 total costs = 43.48% of the project completed. Thus, 43.48% of the total contract value is recognized: $12,500,000 * 43.48% = $5,434,783. Subtract the year one costs from the recognized revenue: $5,434,783 - $3,500,000 = $1,934,783.

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