Question

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

Answer 1

Correct answer will be c) 225000

Detail working for your refrence

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