Question

Bruner Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2014, Bruner started work on a $42,000,000 construction contract that was completed in 2015. The following information was taken from Bruner's 2014 accounting records:
Progress billings $13,200,000
Costs incurred 12,600,000
Collections 8,400,000
Estimated costs to complete 25,200,000
What amount of gross profit should Bruner have recognized in 2014 on this contract?
a. $4,200,000
b. $2,800,000
c. $2,100,000
d. $1,400,000

Answer 1

Answer:

The amount of gross profit to be recognized in 2014 is $1,400,000

Explanation:

Percentage-of-completion (POC) is a revenue recognition method that is used to estimate revenue to be recognized for each accounting period when carrying out a long term contract. This method estimates revenue based on the completion of the long term contract in comparison with the total contract cost in the accounting period. Here is the formula:

         POC           = Cost Incurred from commencement till date

                                 Total Estimated cost to be incurred.

The total estimated cost is given by addition of cost incurred from commencement of contract till date and estimated cost to completion.

After this percentage is derived, it is used to multiply the total contract price in order to derive revenue to be recognized.

In the case of Bruner Constructors, cost incurred till date is $12,600,000 and estimated cost to complete is $ 25,200,000

So POC equals   =      $12,600,000                  X 100

                             ($12,600,000 + $25,200,000)

= 33.333%

Revenue to be recognized = 33.333%  X $42,000,000

= $14,000,000

Note: The figure is rounded up to nearest hundred.

So the gross profit will be

 =  Revenue  - Cost

$14,000,000 - $12,600,000

= $1,400,000