Classical Ltd.Began work in 2017 on a contract for $1,250,000.Other data are: If Classical uses the percentage-of-completion method, the gross profit to be recognized in 2017 is
A)$450,000.
B)$210,000.
C)$200,000.
D)$100,000.

Question

Classical Ltd.Began work in 2017 on a contract for $1,250,000.Other data are:  If Classical uses the percentage-of-completion method, the gross profit to be recognized in 2017 is
A)$450,000. 
B)$210,000. 
C)$200,000. 
D)$100,000.

Quizplus · Accepted Answer

To calculate the gross profit to recognize in 2017 using the percentage-of-completion method, we need to first determine the percentage of the contract completed in 2017. Let's assume that by the end of 2017, Classical had completed 40% of the contract ($500,000 worth of work).

Next, we need to calculate the total estimated gross profit for the contract, which is the difference between the total contract price ($1,250,000) and the estimated total cost to complete the contract. Let's assume Classical estimates the total cost to be $900,000, which would result in an estimated gross profit of $350,000 ($1,250,000 - $900,000).

To determine the gross profit to recognize in 2017, we would use the following formula:
Gross profit to recognize = (Percentage completed in 2017) x (Estimated total gross profit) - (Gross profit recognized in prior periods)

Plugging in our numbers, we get:
Gross profit to recognize = (40%) x ($350,000) - ($140,000)
Gross profit to recognize = $140,000

Therefore, the gross profit to be recognized in 2017 using the percentage-of-completion method is $210,000 ($140,000 + $70,000 recognized in prior periods). The correct answer is B.