Question

Indiana Co. bega n a construction project in 2018 with a contract price of $150 million to receive when the project 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 completed. Indiana 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: C) Recognized $9 million gross profit on the project in 2018.

Explanation:

Duration of construction project from 2018 to 2020 = 3 years

Cost incurred by Indiana co. in 2018 = $36 million

Estimated additional cost for the remainder of the project = $84 million

Total cost to be incurred over the duration of the project = $36 million + $84 million = $120 million

To calculate the percentage of the project completed, we use the cost figures;

Cost incurred so far (in 2018) ÷ Total cost to be incurred × 100

36,000,000/ 120,000,000 × 100 = 30%

Total revenue from contract (which is the contract price) = $150 million

Indiana Co. recognizes revenue according to the percentage of the project completed. Therefore, revenue recognized after 30% of the project is completed (which is the revenue for 2018) = 30% of $150,000,000

Revenue for 2018 = 30/100 × 150,000,000 = $45,000,000

Profit recognized on the project in 2018 = Revenue for 2018 - Cost incurred in 2018

Profit = $45,000,000 - $36,000,000

Gross profit recognized in 2018 = $9,000,000