Melanie Construction company entered into a contract to construct a building for
ID: 2375670 • Letter: M
Question
Melanie Construction company entered into a contract to construct a building for Steve Elbert. The contract called for a flat fee of $900,000, and specified that a progress report be given periodically as to percentage of completion. Construction activities for the first two years are summarized below:
2007: Construction costs incurred during the year amounted to $172,800; estimated cost to complete, $547,200.
2008: Construction costs incurred during the year amounted to $385,450; estimated cost to complete, $166,750.
Instructions:
Using the percentage-of-completion method, compute the amount of gross profit Melanie Construction Company should recognize in 2007 and 2008 as a result of this contract.
2007:
2008:
Explanation / Answer
2007:
Total Gross Profit = 900000-720000 = 180000
Percentage of completeion = 172800/(172800+547200) = 24%
Gross Profit to be recognised in 2007 = 180000*24% = $43200
2008:
Total Gross Profit = 900000- (172800+385450+166750) = 175000
Percentage of completeion till 2008 = 558250/725000 = 77%
Gross Profit to be recignised till 2008 = 175000*77% = 134750
Gross profit alrady recognised in 2007 = 43200
Gross profit to be recognised in 2008 = 134750-43200 = $91550