Question

The contract price for a long-term contract is $20,000. The contracting firm recognizes revenue over time based on the percentage of completion. $4,000 of cost was incurred on the contract in the first year, and $2,667 of gross profit was recognized at the end of the first year. $6,000 of cost was incurred on the contract in the second year, and estimated remaining cost to complete as of the end of the second year was $4,000. Compute the amount of gross profit to be recognized for the second year.

a. 4,286

b. 1,619

c. 2,010

d. 1,842

e. 1,492

Answer 1

Ans:

b.1619

Gross Profit =revenue – cost

Progress Complete=Cost Incurred till Now/Cost Incurred till Now +Expected cost to be incurred

Progress completion

S.NO	Progress Completion	1st year	2nd year
1	Cost Incurred till now	4000	10000
2	Expected cost		4000
3	Completion in %   1/1+2		71.43%

Profit to be recognised on percentage of completion method

=Revenue or contract Price - Cost * Percentage of Completion

=($20,000-$14,000)*71.43%=$4285.8

Gross Profit to be Recognised in Second Year=Total Gross Profit-Profit already recognised in Previous Periods= $4285.8-$2667=$1618.80=$1619 Rounded Off