Franklin Construction entered into a fixed-price contract to build a freeway-connecting ramp for $36 million. Construction costs incurred in the first year were $26 million and estimated remaining costs to complete at the end of the year were $18 million.
How much gross profit or loss will Franklin recognize in the first year if it recognizes revenue over time according to percentage of completion method?

Loss of $4.76 will be recognized.

Explanation:

Percentage of completion =26/(26+18)=59%

Contract price=$36*59%=$21.24

Loss recognized=Revenue-Costs incurred=$21.24-$26=($4.76) million

$8 million

Explanation:

Franklin Construction

Construction costs incurred in the first year were $26 million

Add estimated remaining costs to complete at the end of the year $18 million

Total( $26+$18) $44 Million

Hence:

Fixed-price contract to build a freeway-connecting ramp $36 million -$ 44 million

= $ 8 million (loss)

Therefore gross profit or loss that Franklin will recognize in the first year if it recognizes revenue over time according to percentage of completion method will be $8 million