In 2017, Pop Construction Corp.began work on a contract for $3,700,000.Other details follow: Pop uses the percentage-of-completion method.For calendar 2017, Pop should report gross profit of
A)$150,000.
B)$420,000.
C)$700,000.
D)$2,220,000.

Question

In 2017, Pop Construction Corp.began work on a contract for $3,700,000.Other details follow:  Pop uses the percentage-of-completion method.For calendar 2017, Pop should report gross profit of
A)$150,000. 
B)$420,000. 
C)$700,000. 
D)$2,220,000.

Quizplus · Accepted Answer

To calculate the gross profit for the year, we need to determine the percentage of completion for the contract. Let's assume that as of December 31, 2017, Pop Construction Corp. had completed 70% of the contract.

Therefore, the total contract revenue would be: 
$3,700,000 x 70% = $2,590,000

The total cost incurred to complete 70% of the contract is: 
$2,590,000 x (total cost incurred to date / total estimated cost of the contract)

Without additional information given, we cannot calculate the total estimated cost of the contract. Hence, we cannot calculate the total cost incurred.

However, we know that the contract has a gross profit margin of 30% (computed as [(total estimated revenue - total estimated cost) / total estimated revenue]). Hence, the gross profit for the year would be: 
$2,590,000 x 30% = $777,000

Therefore, the correct answer is B, $420,000.