Total contract price $100,000
Actual costs during 2006 20,000
Estimated remaining costs 40,000
Billed to customer during 2006 30,000
Received from customer during 2006 10,000
16. Under the completed contract method, how much should Hickam recognize as gross profit for 2006?
a. $-0-
b. $4,000
c. $10,000
d. $12,000
17. Under the percentage of completion method, how much should Hickam recognize as gross profit for 2006?
a. $-0-
b. $13,333
c. $26,667
d. $33,333
To determine the gross profit for 2006 under different accounting methods, we need to understand the two methods mentioned: the completed contract method and the percentage of completion method.
1. Completed Contract Method:
Under the completed contract method, revenue and expenses are recognized only when the contract is completed. Therefore, no profit is recognized until the completion of the contract. In this case, the contract is not yet completed, so the answer to question 16 is:
a. $-0-
2. Percentage of Completion Method:
Under the percentage of completion method, revenue and expenses are recognized based on the percentage of work completed. To calculate the gross profit using this method, we need to know the total estimated costs of the project.
a. Calculate the total estimated costs:
Total estimated costs = Actual costs during 2006 + Estimated remaining costs
Total estimated costs = $20,000 + $40,000
Total estimated costs = $60,000
b. Calculate the percentage of completion:
Percentage of completion = (Actual costs during 2006 + Billed to customer during 2006) / Total estimated costs
Percentage of completion = ($20,000 + $30,000) / $60,000
Percentage of completion = 50%
c. Calculate the gross profit:
Gross profit = Total contract price - Total estimated costs
Gross profit = $100,000 - $60,000
Gross profit = $40,000
d. Calculate the gross profit for 2006:
Gross profit for 2006 = Gross profit * Percentage of completion
Gross profit for 2006 = $40,000 * 50%
Gross profit for 2006 = $20,000
Therefore, the answer to question 17 is:
c. $26,667