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Percentage-of-completion method

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Jacks Contractors received a contract to construct a mental health facility for $2,500,000.

Construction was begun in 2005 and completed in 2006. Cost and other data are presented below:
2005 2006
Costs incurred during the year $1,500,000 $1,300,000
Remaining estimated costs to complete 1,200,000 0
Billings during the year 1,200,000 1,300,000
Cash collections during the year 1,000,000 1,500,000

Assume that Jacks uses the percentage-of-completion method for revenue recognition.

Compute the amount of gross profit recognized during 2005 and 2006.

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2005
The costs incurred are 1,500,000 and the total cost to complete the project are ...

Solution Summary

The solution explains the calcuation of gross profit under the percentage of completion method

$2.19
See Also This Related BrainMass Solution

What are the two basic methods of accounting for long-term construction contracts? What circumstances determine when one or the other of these methods should be used? For what reasons should the percentage-of-completion method be used over the completed-contract method whenever possible? Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized for a long-term construction contract. Using the completed contract method, prepare schedules to compute the profit or loss to be recognized for a long-term construction contract.

What are the two basic methods of accounting for long-term construction contracts? What circumstances determine when one or the other of these methods should be used?
For what reasons should the percentage-of-completion method be used over the completed-contract method whenever possible?

Problem

On March 1, 2010, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,400,000. The building was completed by October 31, 2012. The annual contract cost incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2010, 2011, and 2012 are given below.

2010 2011 2012
Contract costs incurred during the year $2,880,000 $2,230,000 $2,190,000
Estimated costs to complete the contract 3,520,000 2,190,000 -0-
at 12/31
Billings to Fabrik during the year 3,200,000 3,500,000 1,700,000

Instructions
(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. (Ignore income taxes.)
(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. (Ignore income taxes.)

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