Question
22. Red Builders agrees to construct a new building for Blue Co. for a total contract price of $6,000,000 on January 1, Year 1. The
22. Red Builders agrees to construct a new building for Blue Co. for a total contract price of $6,000,000 on January 1, Year 1. The construction project is completed after two years. The actual costs and collections for December 31, Year 1 and Year 2, are as follows:
Year 1 Year 2
Cost incurred to date $1,200,000 $4,900,000
Estimated costs to complete 3,600,000 0
Billings 1,050,000 2,300,000
Cash collections 1,000,000 1,900,000
Red has determined that this contract qualifies for revenue recognition using the percentage of completion method. Red will use costs incurred as the measure of progress toward completion of the project.
- What amount of profit should Red recognize on December 31, Year 1?
- What amount of profit should Red recognize on December 31, Year 2?
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