In early 2014, the Key West Company signed a contract for construction of an industrial park to be completed in three years. At that time, estimated total costs were $2,250,000, and estimated total revenues were $4,000,000. During 2014, Key West incurred costs of $960,000 and collected $1,100,000. In December 2014, Key West recalculated total costs for the project to be $3,200,000 while estimated total revenues remained unchanged. What amount of profit (loss) should be recognized by Key West for 2014, using the percentage-of-completion method?
A) $266,667 profit
B) $ 55,000 loss
C) $240,000 profit
D) $285,000 loss

Question

Quizplus · Accepted Answer

To calculate the profit (loss) under percentage-of-completion method, we need to use the cost-to-cost method.
Percentage of completion = Total costs incurred to date / Total estimated costs

Percentage of completion at the end of 2014:
= $960,000 / $3,200,000
= 30%

Revenue recognized in 2014:
= Percentage of completion x Total estimated revenue
= 30% x $4,000,000
= $1,200,000

Profit (loss) recognized in 2014:
= Revenue recognized - Costs incurred
= $1,200,000 - $960,000
= $240,000 profit

In Early 2014, the Key West Company Signed a Contract