Question

Question: P18-10 (LO5,6,7) (Long-Term Contract with Interim Loss) On March 1, 2017, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of \(8,400,000. The building was completed by October 31, 2019. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2017, 2018, and 2019 are given below.

	2017	2018	2019
Contract cost incurred during the year	\)2,880,000	\(2,230,000	\)2,190,000
Estimated cost to complete the contract at 12/31	3,520,000	2,190,000	0
Billings to Fabrik during the year	3,200,000	3,500,000	1,700,000

Instructions

Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2017, 2018, and 2019. (Ignore incomes taxes.)

Short answer

Answer

The business entity will recognize$1,100,000 in gross profit in 2019.

Step-by-step solution

Definition of Contract Price

Contract price can be defined as the sum agreed upon a contract payable on completion or execution of the contract. In other words, it can be said as the consideration paid against the contract.

Gross profit under the complete contract method

Particular	Amount $
Contract price	$8,400,000
Less: Cost incurred	(7,300,000)
Gross profit	$1,100,000

No gross profit will be recognized for 2017 and 2018 because the contract gets completed in 2019.