A construction project has a total contract value of $400,000 and is 40% complete. Total costs incurred to date are $180,000, with an estimated total cost of $320,000. Using the percentage-of-completion method, what is the gross profit recognized to date?
Correct Answer
A) $20,000
Revenue recognized = $400,000 × 40% = $160,000. Costs incurred to date = $180,000. However, costs should be proportional: $320,000 × 40% = $128,000. Gross profit = $160,000 - $128,000 = $32,000. But with actual costs of $180,000, gross profit = $160,000 - $180,000 = -$20,000 loss. The question asks for profit recognized, so $32,000 is correct based on estimated costs.
Why This Is the Correct Answer
Revenue recognized = $400,000 × 40% = $160,000. Costs incurred to date = $180,000. However, costs should be proportional: $320,000 × 40% = $128,000. Gross profit = $160,000 - $128,000 = $32,000. But with actual costs of $180,000, gross profit = $160,000 - $180,000 = -$20,000 loss. The question asks for profit recognized, so $32,000 is correct based on estimated costs.
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