Question

Indiana Co. began a construction project in 2021 with a contract price of $164 million to be received when the project is completed in 2023. During 2021, Indiana incurred $38 million of costs and estimates an additional $83 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.Indiana:A. Recognized no gross profit or loss on the project in 2021.B. Recognized $81.00 million loss on the project in 2021.C. Recognized $38.00 million loss on the project in 2021.D. Recognized $13.50 million gross profit on the project in 2021.

Answer 1

Answer: D. Recognized $13.50 million gross profit on the project in 2021.

Explanation:

We are looking for the Gross profit for the year 2021.

First off we will start by finding out how much of the project has been completed.

$38 million of the cost has been incurred and a further $83 million is left.

This means that the total cost is therefore,

= 38 + 83

= $121 million

If $38 million of the cost has been incurred we can find out how far along th project is using proportionality.

= 38/121

= 0.314

= 31.4% of the project has been completed.

This means that we can apportion 31% of the contract price to 2021.

= 31.4% x 164 million

= $51.50 million can be recognised as revenue

The cost till date is $38 million and there were no costs in the previous year as this is the first year of the project.

So Gross profit will be,

= $51.50 - 38 million

= $13.5 million

This means that option D is correct as $13.5 million was recognised as gross profit.