From Los B. Qbank 09’ question. 2-part Question. An analyst has gathered the following data pertaining to Hegel Company’s construction projects, which began during 2002: ---------------------------------------------------------Project 1 Project 2 Contract price---------------------------------------$420,000 $300,000 Costs incurred in 2002-----------------------------240,000 280,000 Estimated costs to complete----------------------120,000 40,000 Billed to customers during 2002------------------150,000 270,000 Received from customers during 2002------------90,000 250,000 ------------------------------ If Hengel used the completed contract method, what amount of gross profit (loss) would Hengel report in its 2002 income statement for: Project 1 Project 2 A) $0 ($20,000) B) $0 $0 C) ($20,000) $0 ----------------------------------------- If Hengel used the percentage-of-completion method, what amount of gross profit (loss) would Hengel report in its 2002 income statement? A) $20,000. B) 22,500. C) (20,000).
Answer to both of them is B 1. B) $0 $0 - as completed contract method only recognize profit/loss till project completed. 2 B) 22500 For Project 1: Profit= (240K/360K)*(420K-360K)=40000 For Project 2: Profit= (280K/320K)*(300K-320K)=-17500 Net Profit=22500 Let me know if I am wrong
Hey I think the answers are A) $0, ($20000) A) $20000 Under completed contract you don’t recognize any profit till the end but any loss must be immediately recongized. Which would give you a loss of 20K in project 2 that must be recognized in 2002.
The answer is A and A. Can you tell us how you got that answer?
Under completed contract you don’t recognize any profit till the end but any loss must be immediately recongized so project 1 There is a profit of $60 000 (420,000-360,000) so you dont recognize it till after completion project 2 there is an estimated loss of 20,000 (300000-320000) so you would recognize the entire loss in that year. question 2 project 1 there is a prorated profit of 40000 project 2 again you recognize the total loss amount (20000) total P/L = 20000 Hope that helps…
That does! Got it!
I went with B B. Completed contract method does not recognize losses immediately unless there is a project that is wholely unprofitable. This one is not. And I dont know where you got 20000 loss for Project 2 in Per. Comp. My calculation was (280)/(280+40) =0.875 complete. 300 * (0.875) = 262.5 rev recognition. 262.5-280 = -17.5 + 40 from project 1 = 22.5 (B)
Cost incurred + cost to complete project > contract price, therefore it is a loss.