19, Johann Builders has a fixed -price contract providing $120,000 of revenue. C

Question

19, Johann Builders has a fixed -price contract providing $120,000 of revenue. Construction on the contract was begun in 2013 and was completed in 2014. Information relating to the contract is as follows: 2013 2014 Cumulative cost incurred to the end of the year Expected costs to complete Billings to the end of the year Collections to the end of the year 40,000 105,000 60,000 38,000 120,000 46000 0,000 120,000 What amount of income should Johann recognize in 2014 assuming that the company appropriately uses the percentage-of-completion method of income recognition? a. $7,000 b. $9,286 c. $17,000 d. $15,000

Explanation / Answer

Costs to date in 2013 = 40,000

Total estimated costs in 2013 = 40,000 + 60,000 = 100,000

Expected profit in 2013 = 120,000 - 100,000 = 20,000

Gross profit in 2013 = (costs to date / total estimated costs * expected profit) - previously recognized profit

= (40,000 / 100,000 * 20,000) - 0

= 8,000

Costs to date in 2014 = 105,000

Total estimated costs in 2014 = 105,000

Expected profit in 2014 = 120,000 - 105,000 = 15,000

Previously recognized profit in 2014 = 8,000

Gross profit in 2014 = (costs to date / total estimated costs * expected profit) - previously recognized profit

= (105,000 / 105,000 * 15,000) - 8,000

= 7,000

The answer is A.

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