Answer:
$625,000
Explanation:
Calculation for how much income is recognized in Year 3
First step
Year 1 2 3
Cost incurred Till date
1000 (1000+1500)2500 (2500+1250)3750
Estimated cost to complete
3000 1500 0
Total cost of contract
4000 4000 3750
Second step
Using this formula to calculate for the percentage of completion for each year
Percentage of completion =Cost incurred till date /Total cost
Let plug in the formula
Yeat 1= 1,000/4,000 =25%
Year 2= 2,500/4,000 =62.5%
Year 3=3,750/3,750 =100%
Last step
Year 1 2 3
Contract price 5000 5000 5000
Less:Total cost (4000) (4000) (3750)
Gross profit 1000 1000 1250
Percentage of completion
25% 62.5% 100%
Gross profit to be recognized till date (1000*25%)=250 (1000*62.5%)=625 (1250*100%)=1,250
Less:Gross profit recognized till prior year
0 -250 -625
Gross profit to be recognized in current period
250 375 625
Hence;
Year 1 Gross profit is $250,000
Year 2 Gross profit is $375,000
Year 3 Gross profit is $625,000
Therefore the amount of income recognized in year 3 will be $625,000
