To solve this problem, we need to calculate the gross profit using both the percentage-of-completion method and the completed-contract method for each year. ### Information Given: - **Contract Price:** $5,500,000 - **Estimated Total Costs:** $5,000,000 #### Costs Incurred: - **202:** $2,250,000 - **2021:** $2,700,000 - **2022:** $ 450,000 #### Billings and Collections: - **Billings:** - 202: $2,000,000 - 2021: $2,500,000 - 2022: $1,000,000 - **Collections:** - 202: $1,800,000 - 2021: $2,400,000 - 2022: $1,300,000 ### Percentage-of-Completion Method 1. **Calculate Percentage Completed Each Year:** \[ \text{Percentage Completed} = \frac{\text{Cost Incurred to Date}}{\text{Estimated Total Costs}} \] 2. **Calculate Gross Profit Each Year:** \[ \text{Gross Profit} = (\text{Contract Price} \times \text{Percentage Completed}) - \text{Cost Incurred to Date} \] #### Calculations: - **202:** \[ \text{Percentage Completed} = \frac{2,250,000}{5,000,000} = .45 \] \[ \text{Gross Profit} = (5,500,000 \times .45) - 2,250,000 = 247,500 \] - **2021:** \[ \text{Cost Incurred to Date} = 2,250,000 + 2,700,000 = 4,950,000 \] \[ \text{Percentage Completed} = \frac{4,950,000}{5,000,000} = .99 \] \[ \text{Gross Profit} = (5,500,000 \times .99) - 4,950,000 = 495,000 \] - **2022:** \[ \text{Percentage Completed} = 1 \text{ (since project is completed)} \] \[ \text{Gross Profit} = (5,500,000 \times 1) - 5,000,000 = 500,000 \] ### Completed-Contract Method - **202, 2021 Gross Profit:** $ (No profit recognized until completion) - **2022 Gross Profit:** \[ \text{Total Gross Profit} = \text{Contract Price} - \text{Total Costs} = 5,500,000 - 5,000,000 = 500,000 \] ### Journal Entries for 2021 (Percentage-of-Completion): 1. **Record Revenue:** \[ \text{Debit: Construction in Progress (CIP)} = \text{Gross Profit for 2021} \] \[ \text{Credit: Revenue from Long-term Contracts} = \text{Revenue recognized in 2021} \] 2. **Record Billings:** \[ \text{Debit: Accounts Receivable} = 2,500,000 \] \[ \text{Credit: Billings on CIP} = 2,500,000 \] 3. **Record Collections:** \[ \text{Debit: Cash} = 2,400,000 \] \[ \text{Credit: Accounts Receivable} = 2,400,000 \] This setup will help you understand and calculate the required values for each method.

# Gross Profit Calculation Analysis This document outlines the calculations for gross profit using both the **percentage-of-completion** and **completed-contract** methods based on the provided data. ## Information Provided - **Contract Price:** $5,500,000 - **Estimated Total Costs:** $5,000,000 ### Costs Incurred - **2020:** $2,250,000 - **2021:** $2,700,000 - **2022:** $450,000 ### Billings and Collections - **Billings:** - 2020: $2,000,000 - 2021: $2,500,000 - 2022: $1,000,000 - **Collections:** - 2020: $1,800,000 - 2021: $2,400,000 - 2022: $1,300,000 ## Percentage-of-Completion Method ### Step 1: Calculate Percentage Completed Each Year \[ \text{Percentage Completed} = \frac{\text{Cost Incurred to Date}}{\text{Estimated Total Costs}} \] ### Step 2: Calculate Gross Profit Each Year \[ \text{Gross Profit} = (\text{Contract Price} \times \text{Percentage Completed}) - \text{Cost Incurred to Date} \] ### Detailed Calculations - **2020:** \[ \text{Percentage Completed} = \frac{2,250,000}{5,000,000} = 0.45 \] \[ \text{Gross Profit} = (5,500,000 \times 0.45) - 2,250,000 = 247,500 \] - **2021:** \[ \text{Cost Incurred to Date} = 2,250,000 + 2,700,000 = 4,950,000 \] \[ \text{Percentage Completed} = \frac{4,950,000}{5,000,000} = 0.99 \] \[ \text{Gross Profit} = (5,500,000 \times 0.99) - 4,950,000 = 495,000 \] - **2022:** \[ \text{Percentage Completed} = 1 \text{ (project completed)} \] \[ \text{Gross Profit} = (5,500,000 \times 1) - 5,000,000 = 500,000 \] ## Completed-Contract Method - **Gross Profit for 2020 and 2021:** $0 (No profit recognized until completion) - **2022 Gross Profit:** \[ \text{Total Gross Profit} = \text{Contract Price} - \text{Total Costs} = 5,500,000 - 5,000,000 = 500,000 \] ## Journal Entries for 2021 (Using Percentage-of-Completion) 1. **Record Revenue:** - **Debit:** Construction in Progress (CIP) = Gross Profit for 2021 - **Credit:** Revenue from Long-term Contracts = Revenue recognized in 2021 2. **Record Billings:** - **Debit:** Accounts Receivable = 2,500,000 - **Credit:** Billings on CIP = 2,500,000 3. **Record Collections:** - **Debit:** Cash = 2,400,000 - **Credit:** Accounts Receivable = 2,400,000 This structured analysis provides clarity on how to calculate and record gross profit for the specified contract using both methods.