Financial Reporting and Analysis Q81

0. Dynamo Construction Company uses the percentage-of-completion method to recognize revenue from its long term construction contracts and estimates percent completion based on expenditures incurred as a percentage of total estimated expenditures. A three- year contract for €15 million was undertaken. The project is now at the end of its second year, and the following end-of-year information is available:
Year 1 Year 2
Costs incurred during year 4,150,000 3,800,000
Estimated total costs 8,500,000 8,500,000

The profit recognized in year 2 is closest to:

Answer
Comment
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Option : A
Explanation : In year 2, the revenue is: 15 million * 3,800,000 / 8,500,000 = 6,705,882. The profit is: 6,705,882 - 3,800,000 = 2,905,882.

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