Becker_Review_Problems_Week_1 - $360,000 gives an estimated...

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BECKER REVIEW PROBLEMS Week One SURPRISE NEW QUESTION I have received permission to adapt a few isolated problems from the Becker CPA Review Course and will be interspersing them in the Workout Rooms throughout the coming weeks. Here's our first one: The following data is from ABC Company's construction jobs, which commenced during 2006: Project 1 Project 2 Contract price $420,00 0 $300,000 Costs incurred during 2006 240,000 280,000 Estimated costs to complete 120,000 40,000 Billed to customers during 2006 150,000 270,000 Received from customers during 2006 90,000 250,000 If ABC used the percentage-of-completion method, what amount of gross profit (loss) would ABC report in its 2006 income statement? a. $( 20,000) b. $ 20,000 c. $ 22,500 d. $ 40,000 Remember to show calculations! Taken from Becker CPA Review with permission -- company name and dates changed F2/64-CPA-00653 Solution: Choice “b” is correct. For Project 1, $240,000 of the total costs of $360,000 has been incurred, or 2/3 of the total costs. The contract price of $420,000 less estimated costs of
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Unformatted text preview: $360,000 gives an estimated profit of $60,000. Current profit from project 1 is then 2/3 times $60,000, or $40,000. Project 2 estimates a $20,000 loss ($300,000-$280,000-$40,000), which is recognized immediately. ARB 45 para 4. Choice A is incorrect. Under percentage-of completion, project 1 is 2/3 complete and the appropriate profit should be recorded. Choice C is incorrect. Estimated losses are recognized in full immediately (conservatism) Choice D is incorrect. Under percentage of completion, only 2/3 of project 1 is complete, so only 2/3 of the $60,000 profit, or $40,000, is recognized. Project 2 expects a loss. Under conservatism, the loss is recognized in full immediately. FOLLOW-UP: How much gross profit (loss) would ABC report in its 2006 income statement if they used the completed contract method? ($20,000), since loss recognized in full immediately! F2/65-CPA-00647...
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Becker_Review_Problems_Week_1 - $360,000 gives an estimated...

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