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 = <u>Cost Incurred from commencement till date</u>
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 = <u> $12,600,000 </u>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
