Question

A construction company entered into a fixed-price contract to build an office building for $12 million....

A construction company entered into a fixed-price contract to build an office building for $12 million. Construction costs incurred during the first year were $4 million and estimated costs to complete at the end of the year were $6 million. The company recognizes revenue over time according to percentage of completion.

How much revenue and gross profit or loss will appear in the company’s income statement in the first year of the contract?

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Answer #1

Revenue appear in the company's income statement = Total Revenue * (Cost incurred during the first year / Total cost)

= $12,000,000 * [$4,000,000 / ($4,000,000 + $6,000,000)]

= $12,000,000 * ($4,000,000 / $10,000,000)

= $12,000,000 * 0.40

= $4,800,000

Gross profit appear the company's income statement = Gross Profit * (Cost incurred during the first year / Total cost)

Gross profit = Total revenue - Total cost

= $12,000,000 - ($4,000,000 + $6,000,000)

= $12,000,000 - $10,000,000

= $2,000,000

Gross profit appear the company's income statement = $2,000,000 * ($4,000,000 / $10,000,000)

= $2,000,000 * 0.4

= $800,000

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