Question

Indiana Co. began a construction project in 2018 with a contract price of $150 million to be received when the project is completed in 2020. During 2018, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.
A) Recognized no gross profit or loss on the project in 2018.


B) Recognized $6 million loss on the project in 2018.


C) Recognized $9 million gross profit on the project in 2018.


D) Recognized $36 million loss on the project in 2018.

Answer 1

Answer:

Option (C) . Recognized $9 millions Gross profit on the project in 2018.

Explanation:

Given Information,

Contract price = $150 millions

Incurred cost = $36 millions

Estimated cost = $84 millions

Now we need to find the Gross profit in 2018 = [ Revenue to be recognized - Cost incurred ]

Revenue to be recognized in 2018 = Contract price * percentage of completetion

Percentage of completion in 2018 =  Incurred cost / (Incurred cost + Estimated cost)

= [ $36 millions / ($36 millions + $84 millions) ] * 100

= [0.3] * 100

= 30%

Percentage of completion in 2018 = 30%

Revenue to be recognized in 2018 = Contract price * percentage of completetion

= $150 millions * 30%

= $150 millions * 0.30

= $45 millions

Revenue to be recognized in 2018 = $45 millions

Now we need to find the Gross profit in 2018 = [ Revenue to be recognized - Cost incurred ]

= $45 millions - $36 millions

= $9 millions

\thereforeGross profit in 2018  = $9 millions

Then finally answer is Option (C) . Recognized $9 millions Gross profit on the project in 2018.