Question

A construction company entered into a fixed-price contract to build an office building for $44 million. Construction costs incurred during the first year were $14 million and estimated costs to complete at the end of the year were $21 million. The building was completed during the second year. Construction costs incurred during the second year were $22 million.

How much revenue and gross profit or loss will the company recognize in the first and second year if it recognizes revenue upon contract completion?

Answer 1

Working Notes:
	Caclulation of Revenue and Revenue % Generated in year
	Total Estimated cost to be incurred =
	First Year Cost	$              14.00	Million
	Add: Estimated Cost to Complete	$              21.00	Million
	Total Estimated cost for completion	$              35.00	Million
	% of Completion of work in year 1 =	$              14.00	/ By	$    35.00
	% of Completion of work in year 1 =	40%
Solution:
	Caclulation of Revenue and Gross Profit for the year 1
	Revenue = ($ 44 Million X 40%)	$              17.60	Million
	Less: Cost incurred during the first year	$              14.00	Million
	Gross Profit	$                3.60	Million
	Caclulation of Revenue and Gross Profit for the year 2
	Revenue = ($ 44 Million X 60%)	$              26.40	Million
	Less: Actual Cost incurred during the Second Year	$              22.00	Million
	Gross Profit	$                4.40	Million
	Answer =
	Revenue for the year 1 =	$                3.60	Million
	Revenue for the year 2 =	$                4.40	Million