Bluegrass Builders Ltd. Is using the completed-contract method for a $ 2,000,000 contract that will take two years to complete. Data at December 31, 2020, the end of the first year, are $\text{Costs incurred to date}\ldots \ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \$925,000$
$\text{Estimated costs to complete}\ldots \ldots \ldots \ldots \ldots \ldots \ldots1,100,000$
$\text{Billings to date}\ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots \ldots\ldots 850,000$
$\text{Collections to date}\ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots 700,000$
The gross profit or loss that should be recognized for 2020 is

A) $ 50,000 gross profit.
B) $ 25,000 gross profit.
C) $ 25,000 loss.
D) $ 0.

Question

Bluegrass Builders Ltd. Is using the completed-contract method for a $ 2,000,000 contract that will take two years to complete. Data at December 31, 2020, the end of the first year, are $\text{Costs incurred to date}\ldots \ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \$925,000$
$\text{Estimated costs to complete}\ldots \ldots \ldots \ldots \ldots \ldots \ldots1,100,000$
$\text{Billings to date}\ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots \ldots\ldots  850,000$
$\text{Collections to date}\ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots 700,000$
The gross profit or loss that should be recognized for 2020 is

A) $ 50,000 gross profit.
B) $ 25,000 gross profit.
C) $ 25,000 loss.
D) $ 0.

Quizplus · Accepted Answer

Under the completed-contract method, revenue and expenses are recognized only after the contract is completed. Therefore, no revenue or expenses will be recognized in the first year. However, as the costs incurred to date exceed the billings to date, the contract is currently showing a loss.

To calculate the loss, we can subtract the total costs from the total billings and collections:

Total billings = $850,000 
Collections to date = $700,000 
Total costs incurred = $925,000 + $1,100,000 = $2,025,000

Gross loss = Total billings and collections - Total costs incurred 
Gross loss = $850,000 + $700,000 - $2,025,000 
Gross loss = $525,000

Therefore, the gross loss that should be recognized for 2020 is $25,000 (half of the total loss since only one year of the two-year contract has been completed).

Bluegrass Builders Ltd Costs incurred to date………………………$925,000\text{Costs incurred to date}\ldots \ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \$925,000Costs incurred to date………………………$925,000

Bluegrass Builders Ltd $\text{Costs incurred to date}\ldots \ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \$925,000$