Mill Construction Co. uses the percentage-of-completion method of accounting. During 20X5, Mill contracts to build an apartment complex for Drew for $20mn. Mill estimates that total costs would amount to $16mn over the period of construction. In connection with this contract, Mill incurs $2mn of construction costs during 20X5. Mill bills and collects $3mn from Drew in 20X5. What amount should Mill recognize as gross profit for 20x5?

Question

Tori Wong

Business

27 August, 01:19

Mill Construction Co. uses the percentage-of-completion method of accounting. During 20X5, Mill contracts to build an apartment complex for Drew for $20mn. Mill estimates that total costs would amount to $16mn over the period of construction. In connection with this contract, Mill incurs $2mn of construction costs during 20X5. Mill bills and collects $3mn from Drew in 20X5. What amount should Mill recognize as gross profit for 20x5?

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Answers (1)

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Ahmed · Answer 1

Answer: $500,000

Explanation:

The difference between the contract amount and cost incurred is the profit in this case.

Profit from the project = $20mn-$16mn

=$4mn

In the above mentioned project only 12.5% complete at the end of 20X5 ($2mn/$16mn). Total gross profit through the end of 20X5 is therefore

=$4mn x 12.5%

=$500,000

The $500,000 amount is the proportion of completion applied to the total contract profit of $4mn. This is the beginning year of contract so there is no previous profits or expenses that needs to be adjusted. The entire $500,000 gross profit is recognized in 20X5.