Question

Jackson Construction has entered into a contract to build a large taco factory for $220,000. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows:

	First year	Second year	Third year
Costs during year	40,000	80,000	50,000
Estimated costs to complete	120,000	80,000	--

How much gross profit should be recognized a the end of each year, assuming Jackson recognizes revenue over time according to percentage of completion?

Answer 1

	First Year	Second year	Third Year
Gross Profits (loss) = ANSWER	$             15,000.00	$             (3,000.00)	$                38,000.00

• Working

Working		First Year	Second year	Third Year
A	Contract Price	$           220,000.00	$          220,000.00	$              220,000.00
B	Cost Incurred to Date	$             40,000.00	$          120,000.00	$              170,000.00
C	Estimated cost yet to be incurred to complete the contract	$           120,000.00	$             80,000.00	$                                -
D = B+C	Total Cost	$           160,000.00	$          200,000.00	$              170,000.00
E = (B/D) x 100	% of Completion	25.00%	60.00%	100.00%
F = A x E	Revenue to date	$             55,000.00	$          132,000.00	$              220,000.00
G	Revenue of Previous year	$                            -	$             55,000.00	$              132,000.00
H = F - G	Net Revenue this year	$             55,000.00	$             77,000.00	$                88,000.00
I (=B)	Cost to date	$             40,000.00	$          120,000.00	$              170,000.00
J	Cost to date of previous year	$                            -	$             40,000.00	$              120,000.00
K = I - J	Net Cost for the year	$             40,000.00	$             80,000.00	$                50,000.00
L = H - K	Gross Profits (loss) = ANSWER	$             15,000.00	$             (3,000.00)	$                38,000.00