Question

(Gross Profit on Uncompleted Contract) On April 1, 2017, Dougherty Inc. entered into a cost plus fixed fee contract to construct an electric generator for Altom Corporation. At the contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of \(2,000,000. The fixed fee stipulated in the contract is \)450,000. Dougherty appropriately accounts for this contract under the percentage-of-completion method. During 2017, Dougherty incurred costs of \(800,000 related to the project. The estimated cost at December 31, 2017, to complete the contract is \)1,200,000. Altom was billed $600,000 under the contract.

Instructions

Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under the contract for the year ended December 31, 2017. Show supporting computations in good form.

Short answer

The gross profit recognized by Dougherty for the year ended December 31, 2017, is $180,000.

Step-by-step solution

Meaning of Gross Profit

The difference between the company's revenue and the cost of goods sold is known as gross profit. It's frequently used to evaluate a company's labor and material management during theproduction process.

Gross profit to be recognized by Dougherty for the year ended December 31, 2017

Total estimated cost = $2,000,000

Cost incurred = $800,000

Fixed fee = $450,000

$\begin{array}{rcl}\mathrm{Estimated}\mathrm{contract}\mathrm{cost}\mathrm{of}\mathrm{completion}& =& \mathrm{Cost}\mathrm{incurred}+\mathrm{Estimated}\mathrm{cost}\mathrm{at}\mathrm{december}31,2017\\ & =& \$800,000+\$1,200,000\\ & =& \$2,000,000\end{array}$

$\begin{array}{rcl}\mathrm{Total}\mathrm{contract}\mathrm{Price}& =& \mathrm{Estomated}\mathrm{contract}\mathrm{cost}\mathrm{of}\mathrm{completion}+\mathrm{Fixed}\mathrm{fee}\\ & =& \$2,000,000+\$450,000\\ & =& \$2,450,000\end{array}$

$\begin{array}{rcl}\mathrm{Percentage}\mathrm{of}\mathrm{completion}& =& \frac{\mathrm{Cost}\mathrm{incurred}}{\mathrm{Total}\mathrm{contract}\mathrm{cost}}\times 100\\ & =& \frac{\$800,000}{\$2,000,000}\times 100\\ & =& 40\%\end{array}$

$\begin{array}{rcl}\mathrm{Gross}\mathrm{profit}& =& (\mathrm{Contract}\mathrm{price}-\mathrm{Total}\mathrm{contract}\mathrm{cost})\times \mathrm{Percentage}\mathrm{of}\mathrm{completion}\\ & =& (\$2,450,000-\$2,000,000)\times 40\%\\ & =& \$180,000\end{array}$