Pool Contractors (PC)entered into a contract to build a solar heated swimming complex for $1,800,000. Construction commenced on July 1, 2020, with a planned completion date of December 31, 2022. A summary of the related accounting information is provided below: $$\begin{array} { | l | r | r | r | }
\hline & \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } & \mathbf { 2 0 2 2 } \
\hline \text { Costs incurred during the year } & 400,000 & 500,000 & 650,000 \
\hline \text { Estimated costs to complete at year end } & 1,200,000 & 600,000 & 0 \
\hline \text { Billings during the year } & 560,000 & 640,000 & 600,000 \
\hline \text { Cash collections during the year } & 500,000 & 310,000 & 990,000 \
\hline
\end{array}$$ How much gross profit would be recognized in fiscal 2021 if PC uses the percentage of completion method?
A)$50,000
B)$100,000
C)$130,000
D)$180,000

Question

Pool Contractors (PC)entered into a contract to build a solar heated swimming complex for $1,800,000. Construction commenced on July 1, 2020, with a planned completion date of December 31, 2022. A summary of the related accounting information is provided below: $$\begin{array} { | l | r | r | r | } 
\hline & \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } & \mathbf { 2 0 2 2 } \
\hline \text { Costs incurred during the year } & 400,000 & 500,000 & 650,000 \
\hline \text { Estimated costs to complete at year end } & 1,200,000 & 600,000 & 0 \
\hline \text { Billings during the year } & 560,000 & 640,000 & 600,000 \
\hline \text { Cash collections during the year } & 500,000 & 310,000 & 990,000 \
\hline
\end{array}$$ How much gross profit would be recognized in fiscal 2021 if PC uses the percentage of completion method?
A)$50,000
B)$100,000
C)$130,000
D)$180,000

Quizplus · Accepted Answer

According to the percentage of completion method, gross profit is recognized based on the proportion of costs incurred to total estimated costs.

For 2021, costs incurred during the year were $500,000 and estimated costs to complete at year-end were $600,000, for a total of $1,100,000.

The proportion of costs incurred to total estimated costs is $500,000/$1,100,000, or 45.45%.

Therefore, the gross profit recognized in 2021 would be 45.45% of the total gross profit, which is $1,800,000 - $400,000 = $1,400,000.

Gross profit recognized in 2021 = 45.45% x $1,400,000 = $636,000

The gross profit recognized in 2021 is the difference between the gross profit recognized in 2020 and the gross profit recognized in 2022.

Gross profit recognized in 2020 = 20% x $1,400,000 = $280,000

Gross profit recognized in 2022 = $1,400,000 - $636,000 - $280,000 = $484,000

Therefore, the gross profit recognized in 2021 is $636,000 - $280,000 = $356,000 or approximately $130,000 more than the gross profit recognized in 2020.

The best choice is C, $130,000, as it correctly calculates the gross profit recognized in 2021 using the percentage of completion method.

Pool Contractors (PC)entered into a Contract to Build a Solar