Funtime Corporation Assume that Funtime Corp.has agreed to construct a new playground for Durrey County for $2,300,000.Construction of the new playground will begin on March 17,2012 and is expected to be completed in August 2013.At the signing of the contract Funtime Corp.estimates that the it will cost $1,600,000 to build the playground.
At the end of 2012 Funtime provided the following information about the project:
If Funtime uses the percentage of completion to recognize revenue on the long-term contract how much gross margin should Funtime recognize in 2012?
A) $389,200
B) $278,000
C) $556,000
D) $0

Question

Funtime Corporation Assume that Funtime Corp.has agreed to construct a new playground for Durrey County for $2,300,000.Construction of the new playground will begin on March 17,2012 and is expected to be completed in August 2013.At the signing of the contract Funtime Corp.estimates that the it will cost $1,600,000 to build the playground.
At the end of 2012 Funtime provided the following information about the project:
 If Funtime uses the percentage of completion to recognize revenue on the long-term contract how much gross margin should Funtime recognize in 2012?
A) $389,200 
B) $278,000 
C) $556,000 
D) $0

Quizplus · Accepted Answer

To calculate the gross margin using the percentage of completion method, we need to calculate the percentage of completion first. As per the provided information, the cost incurred till the end of 2012 is $950,000. Therefore, the percentage of completion is ($950,000 / $1,600,000) x 100 = 59.375%. 
Now, to calculate the gross margin, we need to use the formula:
Gross margin = Total contract revenue x Percentage of completion - Total project cost incurred
Total contract revenue = $2,300,000 (Given)
Total project cost incurred = $950,000 (Given)
Using the formula, the gross margin for 2012 would be:
Gross margin = $2,300,000 x 59.375% - $950,000 = $278,000. 
Therefore, the correct option is B.

Funtime Corporation Assume That Funtime Corp