Question

Use the following data to select one best answer to the following question:

What is the gross profit for the low-rise office building project by applying Completed Contract method without absorption?

A construction company began operations on January 2, 2010. During the year the company was awarded one construction contract of low-rise office building. The company incurred $100,000 operating expenses for the year for which $75,000 has been paid while the balance is owed as of December 31, 2010. Project data is summarized for the project in the following paragraphs.

The initial contract for the low-rise office building was signed on January 5, 2010 in the amount of $1,000,000. This amount included $800,000 for construction costs, $150,000 for overhead mark-up, and $50,000 for profit markup. The contractor broke ground on February 4, 2010. During the course of construction the client decided to upgrade the quality of the lighting and plumbing fixtures, resulting in a change order issued to the contractor in the amount of $100,000 on October 7, 2010. The change order price was calculated by the contractor as follows: $50,000 construction costs, $37,500 overhead markup, $12,500 profit markup.

At the end of 2010, construction was not complete. However, the client was renting out office space to other entities as well as using some of the offices for the client’s own business entity. Work remaining as of December 31, 2010 included surfacing the parking lot, erecting a portable parking attendant’s station, miscellaneous site concrete work and landscaping. This work was schedule to be completed by May 1, 2010, weather permitting.

A summary of accounting data as of December 31, 2010 included total construction costs in the amount of $800,000 for which $600,000 was paid. The balance reflected unpaid bills for the month of December, and retention withheld on subcontracts throughout the course of the project. The total progress billing as of December 31, 2010 was $1,000,000 of which $900,000 was collected with the balance outstanding as retention receivable. The project manager estimated that given the work left to be completed, approximately $200,000 of construction cost would be incurred.

Question 10 options:

A)

400,000

B)

100,000

C)

200,000

D)

300,000

Answer 1

As we need to calculate the gross profit applying cash method for recognizing revenue, we will take into account  only the amount of money thar has actually been collected /paid by the contractor upto the end of the year.the value of gross profit can be calculateed as below:

Gross profit (cash basis)=cash collected as at the end of the year-construction costs paid as the end of the year

using the value provided in the question,we get.

gross profit(cash basis)=900,000-600,000=$300,000

NOTE

AS we need to determine the value of gross profit,opertaing expenses paid by the contractor during the year will not be considered