Question

74 757. 2.) Frame Construction company's contract requires the construction of a bridge in 3 years. The expected cost of the bridge is $2 million and Frame will receive $2.5 million for the project. The actual costs incurred to complete the project were $500,000, $900,000, and $600,000, respectively during each of the 3 years. Progress payments received by Frame were $600,000, $1.2 million and $700,000 in each year respectively. Assuming that the percentage-of-completion method is used, what amount of gross profit should Frame report during the last year of the project?

Answer 1

Solution -

$150,000

Explanation -

The gross profit realised for the first two years must be computed first. Then, the difference between the $500,000 final total gross profit on the project ($2.5mn − $2mn).

And gross profit for the first two years is the amount of gross profit recognised in the last (third) year. The % of completion at the end of the first two years is 70% (= $500,000 + $900,000)/$2mn).

The gross profit recognised through the end of year two is $350,000 [= .70($2.5mn − $2mn)]. Thus, gross profit for year three is $150,000 ($500,000 total gross profit on the project − $350,000).