Question

Indiana Co. began a construction project in 2021 with a contract price of $150 million to be received when the project is completed in 2023. During 2021, 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.
Suppose that, in 2022, Indiana incurred additional costs of $63.75 million and estimated an additional $42.75 million in costs to complete the project. Indiana:

A. Recognized $3.75 million loss on the project in 2022.

B. Recognized $5.25 million gross profit on the project in 2022.

C. Recognized $7.5 million gross profit on the project in 2022.

D. Recognized $1.5 million loss on the project in 2022.

Answer 1

Answer: A. Recognized $3.75 million loss on the project in 2022.

Explanation:

The project is 70% complete after 2022

i.e $99.75 million costs to date / $142.5 million estimated total costs.

The estimated gross profit is now $7.5 million

( i.e., $150 million - $142.5 million)

gross profit to date is $5.25 million. $9 million was recognized in 2021 so a $3.75 million loss is recognized in 2022.