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

Solution:

Total cost incurred till the end of second year = $4000 + $6000 = $10,000

Total Estimated cost = $4000 + $6000 + $4000 = $14,000

Percentage of completion till the end of second year = Total Cost incurred / Total Estimated cost = 10000 / 14000 = 71.43%

Total Estimated Gross profit = Contract price - Total Estimated cost = $20000 - $14000 = $6000

Gross Profit to be recognized in second year = (Total estimated Gross profit * Percentage of Completion) - Revenue already recognized in first year

= ($6000*71.43%) - $2667

= $1,619

Hence option "b" is correct.