Question

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 –0–

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.

Short answer

Gross profit for 2017, 2018, 2019 are $240,000, $135,000, $155,000 respectively.

Step-by-step solution

Gross Profit

Gross profit is the difference between the revenue of the company and the cost of goods sold. It's often used to assess how well a corporation manages labor and materials in the manufacturing process.

Gross profit for each year by percentage-of-completion

2017:

$\begin{array}{rcl}\mathrm{Total}\mathrm{cost}& =& \mathrm{Cost}\mathrm{incurred}+\mathrm{Estimated}\mathrm{cost}\mathrm{of}\mathrm{completing}\\ & =& \$400,000+\$600,000\\ & =& \$1,000,000\end{array}$

$\begin{array}{rcl}\mathrm{Percentage}\mathrm{of}\mathrm{completion}& =& \frac{\mathrm{Cost}\mathrm{incurred}}{\mathrm{Total}\mathrm{cost}}\times 100\\ & =& \frac{\$400,000}{\$1,000,000}\times 100\\ & =& 40\%\end{array}$

$\begin{array}{rcl}\mathrm{Gross}\mathrm{profit}& =& (\mathrm{Contract}\mathrm{price}-\mathrm{Total}\mathrm{cost})\times \mathrm{Percentage}\mathrm{of}\mathrm{completion}\\ & =& (1,600,000-1,000,000)\times 40\%\\ & =& 600,000\times 40\%\\ & =& \$240,000\end{array}$

2018:

$\begin{array}{rcl}\mathrm{Total}\mathrm{cost}& =& \mathrm{Cost}\mathrm{incurred}+\mathrm{Estimated}\mathrm{cost}\mathrm{of}\mathrm{completing}\\ & =& \$825,000+\$275,000\\ & =& \$1,100,000\end{array}$

$\begin{array}{rcl}\mathrm{Percentage}\mathrm{of}\mathrm{completion}& =& \frac{\mathrm{Cost}\mathrm{incurred}}{\mathrm{Total}\mathrm{cost}}\times 100\\ & =& \frac{\$825,000}{\$1,100,000}\times 100\\ & =& 75\%\end{array}$

$\begin{array}{rcl}\mathrm{Gross}\mathrm{profit}& =& \left[\right(\mathrm{Contract}\mathrm{price}-\mathrm{Total}\mathrm{cost})\times \mathrm{Percentage}\mathrm{of}\mathrm{completion}]-Grossprofitin2017\\ & =& \left[\right(1,600,000-1,100,000)\times 75\%]-\$240,000\\ & =& [\$500,000\times 75\%]-\$240,000\\ & =& \$135,000\end{array}$

2019:

$\begin{array}{rcl}\mathrm{Gross}\mathrm{profit}& =& \mathrm{Contract}\mathrm{price}-\mathrm{Total}\mathrm{cost}-\mathrm{Gross}\mathrm{profit}\mathrm{in}2017-\mathrm{Gross}\mathrm{profit}\mathrm{in}2018\\ & =& \$1,600,000-\$1,070,000-\$240,000-\$135,000\\ & =& \$155,000\end{array}$