Question

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In spring of2000, Parmac Engineering Co. signed a $240 million contract to construct a new city hall. The city paid $60 million when the contract was signed, will pay $120 million within the next six months, and the final $60 million exactly one year from the signing of the contract.

Parmac expects to construct the building within two years and incur expenses of $180 million. Parmac incurred $72 million in costs during 2017, and rest of the cost will incur in 2018.

Using the cost-to-cost method, how much gross profit should Parmac recognize in 2017 and 2018 respectively?

Group of answer choices

2017: 26M; 2018: 32M

2017: 24M; 2018: 36M

2017: 20M; 2018: 36M

2017: 36M; 2018: 24M

Answer #1

Answer :- **2017 : 24M; 2018: 36M**

Calculation :-

In Cost to cost method, Sale is recognised on percentage of cost incureed till date.

So in 2017 = Percentage of cost incurred = 72/180 ==> 40%

So in 2018 = Percentage of cost incurred = 102/180 ==> 60%

So Sale recognised in 2017 will be 240 * 40% = 96M

And Gross profit in 2017 = Sales recognised - Cost incurred

= 96 - 72 ==> **24M**

So Sale recognised in 2017 will be 240 * 60% = 144M

And Gross profit in 2017 = Sales recognised - Cost incurred

= 144 - 108 ==> **36M**

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