Island Builders, Inc., has consistently used the percentage-of-completion method of accounting for construction type contracts. During 2004 Island Builders started work on a $9,000,000 fixed-price construction contract that was completed in 2006, Island Builders’ accounting record disclosed the following:
December 31
2004 2005
Cumulative contract costs incurred $3,900,000 $6,300,000
Estimated total costs at completion 7,800,000 8,100,000
How much of income would Island Builders Inc. have recognized for the year ended December 31, 2005?
a. $100,000
b. $300,000
c. $600,000
d. $700,000
To determine the amount of income recognized by Island Builders, Inc. for the year ended December 31, 2005, we need to calculate the percentage of completion for the project at that point in time.
Percentage of completion = (Cumulative contract costs incurred / Estimated total costs at completion) * 100
For 2005, the cumulative contract costs incurred were $6,300,000 and the estimated total costs at completion were $8,100,000. Plugging these values into the formula:
Percentage of completion = ($6,300,000 / $8,100,000) * 100 = 77.78%
Therefore, Island Builders, Inc. would have recognized 77.78% of the income for the year 2005.
To calculate the income recognized:
Income recognized = 77.78% * ($9,000,000 - $3,900,000) = 77.78% * $5,100,000 = $3,975,000
Therefore, the correct answer is not provided among the options. It should be $3,975,000.