Question

Problem 5: A $3,600,000 contract is executed to build a service station. Total estimated costs to...

Problem 5: A $3,600,000 contract is executed to build a service station. Total estimated costs to complete the project are $2,340,000 million. The construction company incurred the following costs during the project: $936,000 in 2019; $234,000 in 2020; and $1,170,000 in 2021.

Required: a. Compute revenues, expenses, and income for each year 2019 through 2021 using the percentage-of-completion method.

b. Compute revenues, expenses, and income for each year 2019 through 2021 using the zero gross profit method.

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Answer #1

Given total revenue = $3600000

Total cost = $2340000. cost incurred during each years are $936,000 in 2019; $234,000 in 2020; and $1,170,000 in 2021

a). In percentage completion method, Revenue for the period is recognized in ratio of the cost incurred.

So, revenues, expenses, and income for each year 2019 through 2021 are

Year 2019 2020 2021
Revenue $1440000 $360000 $1800000
Cost $936000 $234000 $1170000
Profit $504000 $126000 $630000

b). in zero gross profit method, revenue is equal to cost before the project is completed and all the profit is recognized in the final year of project

So, revenues, expenses, and income for each year 2019 through 2021 are

Year 2019 2020 2021
Revenue $936000 $234000 $2430000
Cost $936000 $234000 $1170000
Profit 0 0 $1260000
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