Question

Winsor Construction Company uses the percentage-of-completion method of accounting. In 2007, Winsor began work on a contract it had received which provided for a contract price of $7,500,000. Other details follow: 2007 Costs incurred during the year $3,600,000 Estimated costs to complete as of December 31 2,400,000 Billings during the year 3,300,000 Collections during the year 1,950,000 What should be the gross profit recognized in 2007?

Answer 1

Answer:

The gross profit recognized in 2007 is $1,200,000

Explanation:

Use the following formula to the percentage of completion

Percentage of completion =  Total Cost / Contract price

Total cost = Cost incurred to date + Estimated cost to complete = $3,600,000 + $2,400,000 = $6,000,000

Contract price = $7,500,000

Placing values in the formula

Percentage of completion =  $6,000,000 / $7,500,000 = 0..80 = 80%

Use the following formula to calculate the gross profit

Gross profit = Contract price - Total Cost = $7,500,000 - $6,000,000 = $1,500,000

Now calculate the gross profit recognised as follow

Gross profit recognised = Gross profit x Percentage of completion = $1,500,000 x 80% = $1,200,000