Use the following information for questions 57-58.
Dinca Construction Co. agreed to build a bridge for Gotham City. The contract specifies that construction will take three years and Dinca will receive $12,500,000. The company expects annual costs to be $3,500,000; $2,750,000; and $1,800,000.
-Assume Dinca 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

Quizplus · Accepted Answer

To calculate profits for year one, we first need to calculate the percentage of completion for year one. This can be calculated as:

Percentage of completion for year one = (costs incurred in year one) / (total estimated costs)

Costs incurred in year one = $3,500,000
Total estimated costs = $3,500,000 + $2,750,000 + $1,800,000 = $8,050,000

Percentage of completion for year one = $3,500,000 / $8,050,000 = 0.434

Next, we need to calculate the revenue recognized for year one, which can be calculated as:

Revenue recognized for year one = (total contract value) x (percentage of completion for year one)

Total contract value = $12,500,000

Revenue recognized for year one = $12,500,000 x 0.434 = $5,427,536

Finally, we can calculate profits for year one, which is equal to:

Profits for year one = (revenue recognized for year one) - (costs incurred in year one)

Profits for year one = $5,427,536 - $3,500,000 = $1,934,536

Therefore, the best choice is C, with profits for year one being $1,934,783 (rounded to nearest thousand).

Use the Following Information for Questions 57-58