A commercial project has a total contract value of $500,000. To date, costs incurred are $180,000 and the project is estimated to be 40% complete. Using the percentage-of-completion method, what is the gross profit recognized to date?
Correct Answer
A) $20,000
Revenue recognized = $500,000 × 40% = $200,000. Gross profit = Revenue recognized ($200,000) - Costs incurred ($180,000) = $20,000.
Why This Is the Correct Answer
The percentage-of-completion method recognizes revenue proportionally based on project completion percentage. With 40% completion on a $500,000 contract, revenue recognized is $200,000. Gross profit is calculated as recognized revenue minus actual costs incurred, which equals $200,000 - $180,000 = $20,000. This method matches revenue recognition with actual project progress.
Why the Other Options Are Wrong
Option C: $120,000
This is simply the revenue recognized to date ($500,000 × 40% = $200,000) without subtracting the actual costs incurred ($180,000) to arrive at gross profit.
Option D: $70,000
This incorrectly calculates gross profit as if total estimated profit ($120,000) should be partially recognized, but ignores that actual costs ($180,000) must be subtracted from recognized revenue ($200,000) to determine current gross profit.
Memory Technique
Remember 'RIP': Revenue recognized, then subtract Incurred costs, equals Profit recognized. Revenue comes first, then you 'rip' away the costs to find profit.
Reference Hint
Look up 'Percentage-of-Completion Method' or 'Revenue Recognition' in accounting or construction management chapters of your reference materials.
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