Bruner Constructors, Inc. has consistently used the percentage-of-completion met

Question

Bruner Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2014, Bruner started work on a $42,000,000 construction contract that was completed in 2015. The following information was taken from Bruner's 2014 accounting records:

Progress billings                                                   $13,200,000

Costs incurred                                                        12,600,000

Collections                                                               8,400,000

Estimated costs to complete                                   25,200,000

What amount of gross profit should Bruner have recognized in 2014 on this contract?

a.   $4,200,000

b.   $2,800,000

c.   $2,100,000

d.   $1,400,000

Answer is d. Can anyone show me the process?

Explanation / Answer

An accounting method in which the revenues and expenses of long-term contracts are recognized yearly as a percentage of the work completed during that year. This is the opposite of the completed contract method, which allows taxpayers to defer the reporting of any income and expenses until a long-term project is completed. The percentage of completion method of accounting is commonly used in construction projects.

It determines revenue recognized in one accounting period in accordance with the following formula:

Revenue Recognized = Total Contract Value X Percentage of Work Completed in the Period

Total contract value is the total revenue from the long-term contract.

Percentage of work completed is the proportion of work completed in a period to total work for the contract. It is usually estimated using the following formula:

Percentage of Work Completed

= Expenditures Incurred from Inception to Date / Total Estimated Costs for the Contract

Expenditures incurred from inception to date represent costs incurred from the start of the project to the date of estimation.

So here,

Percentage of Work Completed

= $12,600,000/ ($12,600,000+25,200,000)

= 0.3333 = 33.33%

So,

Revenue Recognised = $42,000,000 X 33.33% = $ 1,400,000

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