Question

ABC Properties Ltd. has a contract to build a hotel for $3,000,000 to be received in equal installments over 4 years. A reliable estimate of total cost of this contract is $1,500,000. During the first year, ABC will incur $400,000 in cost. During the second year, $500,000 of costs will be incurred. And then $300,000 will be incurred in the last two years. The company is quite sure that the project will be completed on time. According to the US GAAP, how much if the profit that can be reported in the second year of the project? Use percentage-of-completion method.

Answer 1

Year	Cost to date	Estimated total cost
1	$400,000	$1,500,000
2	$900,000	$1,500,000
3	$1,200,000	$1,500,000
4	$1,500,000	$1,500,000

Expected profit = $3,000,000 - $1,500,000 = $1,500,000

Gross profit under the percentage of completion method = (cost to date / estimated total cost * expected profit) - previously recognized profit

Year 1 = ($400,000 / $1,500,000 * $1,500,000) - $0

= $400,000

Year 2 = ($900,000 / $1,500,000 * $1,500,000) - $400,000

= $500,000