Russell Ltd commenced the construction of a bridge on 1July 2003.It has a fixed-price contract for total revenues of $35million.The expected completion date is 30 June 2006.The expected total cost to Russell Ltd at the beginning of the project is $29 million.The following information relates only to the construction of the bridge: Russell Ltd uses the percentage of completion method based on cost to account for its construction contracts.What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)?
E) None of the given answers.

Question

Russell Ltd commenced the construction of a bridge on 1July 2003.It has a fixed-price contract for total revenues of $35million.The expected completion date is 30 June 2006.The expected total cost to Russell Ltd at the beginning of the project is $29 million.The following information relates only to the construction of the bridge:  Russell Ltd uses the percentage of completion method based on cost to account for its construction contracts.What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)?
E) None of the given answers.

Quizplus · Accepted Answer

To determine the gross profit to be recognized each year, we need to calculate the percentage of completion at the end of each year and use it to determine the revenue and cost recognized for that year.

Year 1 (1 July 2003 - 30 June 2004):
Assuming that by the end of the year, Russell Ltd has incurred $10 million of cost, we can calculate the percentage of completion as follows:
Percentage of completion = total cost incurred to date / expected total cost
= $10 million / $29 million 
= 34.5%
Revenue recognized = 34.5% x $35 million (total contract price) 
= $12.08 million 
Cost recognized = $10 million

Therefore, the gross profit to be recognized in Year 1 is $2.08 million ($12.08 million - $10 million), rounded to the nearest $000.

Year 2 (1 July 2004 - 30 June 2005):
Assuming that by the end of the year, Russell Ltd has incurred $20 million of cost, we can calculate the percentage of completion as follows:
Percentage of completion = total cost incurred to date / expected total cost
= $20 million / $29 million 
= 69%
Revenue recognized = 69% x $35 million (total contract price) 
= $24.15 million 
Cost recognized = $20 million

Therefore, the gross profit to be recognized in Year 2 is $4.15 million ($24.15 million - $20 million), rounded to the nearest $000.

Year 3 (1 July 2005 - 30 June 2006):
Assuming that by the end of the year, Russell Ltd has incurred $29 million of cost (which is the expected total cost), we can calculate the percentage of completion as follows:
Percentage of completion = total cost incurred to date / expected total cost
= $29 million / $29 million 
= 100%
Revenue recognized = 100% x $35 million (total contract price) 
= $35 million 
Cost recognized = $29 million

Therefore, the gross profit to be recognized in Year 3 is $6 million ($35 million - $29 million), rounded to the nearest $000.

In summary, the gross profit to be recognized each year is as follows:
Year 1: $2.08 million
Year 2: $4.15 million
Year 3: $6 million

The closest answer is B, which matches the computed gross profit for each year.

Russell Ltd Commenced the Construction of a Bridge on 1July