Question

# Redwood Construction Company uses the percentage-of-completion method of accounting for long-term construction contracts. During 2021, Redwood...

Redwood Construction Company uses the percentage-of-completion method of accounting for long-term construction contracts. During 2021, Redwood began work on a \$4,300,000 fixed-fee construction contract, which was completed in 2024.

 Cost Incurred Estimated Additional Cost to Complete 2021 \$800,000 \$3,200,000 2022 \$1,000,000 \$2,200,000 2023 \$936,000 \$1,064,000

For the year 2023, Redwood should have recognized gross profit on this contract of:

A)500,000 B)300,000 C)225,00 D)135,000

Correct answer will be c) 225000

 Statement showing computation of Gross Profit recognizze over time assuming percebtage of completion method Percentages of completion Choose numerator ÷ Choose denominator = % complete to date Actual costs to date Estimated total costs 2021 \$800,000 ÷ \$4,000,000 = 20.00% (800000+3200000) 2022 \$1,800,000 ÷ \$4,000,000 = 45.00% (1800000+2200000) 2023 2736000 3800000 72.00% (2736000+1064000) 2021 To date (A) Recognized in prior years (B) Recognized in 2021 (A-B) Construction revenue \$860,000 \$0 \$860,000 (4300000*20% Less: Construction expense \$800,000 \$0 \$800,000 Gross profit (loss) \$60,000 \$0 \$60,000 2022 To date (A) Recognized in prior years (B) Recognized in 2022 (A-B) Construction revenue \$1,935,000 \$860,000 \$1,075,000 (4300000*45% Less: Construction expense \$1,800,000 \$800,000 \$1,000,000 Gross profit (loss) \$135,000 \$60,000 \$75,000 2023 To date (A) Recognized in prior years (B) Recognized in 2023 (A-B) Construction revenue \$3,096,000 \$1,935,000 \$1,161,000 (4300000*72%) Less: Construction expense \$2,736,000 \$1,800,000 \$936,000 Gross profit (loss) \$360,000 \$135,000 \$225,000

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