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 $0 B) $0 ($20,000) C) ($20,000) $0 Your answer: A was incorrect. The correct answer was B) $0 ($20,000) No profit is recognized until the completion of the project, however losses are recognized. Project 2 has an expected loss of $20,000. -------------------------------------------------------------------------------- If Hengel used the percentage-of-completion method, what amount of gross profit (loss) would Hengel report in its 2002 income statement? A) 22,500. B) (20,000). C) $20,000. Your answer: A was incorrect. The correct answer was C) $20,000. Under the percentage of completion method, $40,000 of profit is recognized for project 1. 120,000 + 240,000 = 360,000 total costs; 240,000 / 360,000 × 60,000 estimated profit = $40,000 profit. Project 2 is running at a $20,000 loss. If the loss can be estimated the loss must be recognized at the time it is estimated. Total revenue for project 2 = 300,000 contract price − 320,000 total costs = -$20,000 estimated loss 40,000 (project 1) − 20,000 (project 2) = $20,000 gross profit in 2002 ------------------------------------------------------------------------------------- Question from Qbank but in 2nd question why we do not recognize loss in percentage ?
If you expect to make a loss on a LT contract the entire amount of the loss has to be recognized immediately irrepsective of which revenue recognition method is used.