Question

Indiana Co. began a construction project in 2021 with a contract price of $163 million to be received when the project is completed in 2023. In 2021, Indiana incurred $35 million of costs and estimates an additional $83 million of costs to complete the project. Indiana recognizes revenue over time and this project recognizes revenue over time according to the percentage of the project that has been completed.
Indiana:___________
A. Recognized no gross profit or loss on the project in 2021.
B. Recognized $81.00 million loss on the project in 2021.
C. Recognized $38.00 million loss on the project in 2021.
D. Recognized $13.50 million gross profit on the project in 2021.

Answer 1

Answer:

D. Recognised $13.5 million gross profit on the project in 2021.

Explanation:

Firstly, we will begin by getting how much of the project has been completed

$35 million of the cost has been incurred and a further $83 million left

This means that the total cost would be;

= $35 + $83

= $118

If $35 million of the cost has been incurred, we can find out how far the project is using its proportionality .

= 35/118

= 0.297

= 29.7% of the project has been completed.

The above implies that we can apportion 29.7% of the contract price to 2021.

= 29.7% × $163 million

= $48.411 can be recognised as revenue

The cost till date is $35 and there were no costs in the previous year as this is the first year of the project.

Hence, the gross profit would be;

= $48.411 million - $35 million

= $13.5 million