A construction company completed 60% of a $500,000 project by year-end. Total costs incurred to date are $280,000, with estimated total costs of $420,000. Using the percentage-of-completion method, what is the gross profit recognized?
Correct Answer
D) $20,000
Revenue recognized = $500,000 × 60% = $300,000. Costs incurred = $280,000. Gross profit = $300,000 - $280,000 = $20,000. The percentage-of-completion method recognizes profit based on project completion percentage.
Why This Is the Correct Answer
Under the percentage-of-completion method, revenue is recognized proportionally based on project completion percentage. With 60% completion, revenue recognized equals $500,000 × 60% = $300,000. Gross profit is calculated as recognized revenue minus costs incurred to date, which equals $300,000 - $280,000 = $20,000. This method matches revenue recognition with actual project progress.
Why the Other Options Are Wrong
Option A: $80,000
$80,000 represents the total estimated profit for the entire project ($500,000 contract - $420,000 estimated total costs). This ignores the percentage-of-completion principle and would only be correct if 100% of the project were complete.
Option B: $48,000
$48,000 incorrectly calculates profit as if using the total estimated profit ($500,000 - $420,000 = $80,000) multiplied by 60% completion. This approach double-applies the percentage completion concept and doesn't follow the proper percentage-of-completion accounting method.
Memory Technique
Use 'PRC': Percentage × Revenue = Recognized revenue, then subtract Costs incurred to get profit. Think 'Progress Revenue minus Current costs equals Profit Recognized.'
Reference Hint
Look up 'Percentage-of-Completion Method' in accounting or construction management chapters, typically found under 'Revenue Recognition' or 'Construction Accounting' sections.
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