During 2007, Eaton Corp. started a construction job with a total contract price

Question

During 2007, Eaton Corp. started a construction job with a total contract price of $3,500,000. The job was completed on December 15, 2008. Additional data are as follows:

                                                                                              2007                                                                                                 2008                                                                                 

Actual costs incurred                                                                             $1,350,000 $1,525,000

Estimated remaining costs                                                                                    1,350,000 —

Billed to customer                                                                             1,200,000 2,300,000

Received from customer                                                                             1,000,000 2,400,000

Under the completed-contract method, what amount should Eaton recognize as gross profit for 2008?

a.         $225,000

b.         $312,500

c.         $475,000

d.         $625,000

Explanation / Answer

A. $225000

Degree of completion of work   

2007

= cost incurred/ total estimated cost. 135000/(135000+135000) = 50%

2008 = 100%

2007, contract revenue = 3500000 × 50% = $175000

Cost incurred. = $1350000

Profit. = $400000

2008

Contract revenue = $3500000

Less Contract cost = 2875000( 1350000 + 1525000)

Profit till date. = $625000

Profit recogniGED in 2007 = $400000

Profit for 2008. = $ 225000

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