question about revenue recognition following, completed, contract, customers, question

towardsutopia21

An analyst has gathered the following data pertaining to Hegel Company’s construction projects, which began during 2002:

Project 1 Project 2
Contract price $420,000 $300,000
Costs incurred in 2002 240,000 280,000
Estimated costs to complete 120,000 40,000
Billed to customers during 2002 150,000 270,000
Received from customers during 2002 90,000 250,000



If Hengel used the completed contract method, what amount of gross profit (loss) would Hengel report in its 2002 income statement for:

Project 1 Project 2


A) $0 $0


B) $0 ($20,000)


C) ($20,000) $0



Your answer: A was incorrect. The correct answer was B) $0 ($20,000)

No profit is recognized until the completion of the project, however losses are recognized. Project 2 has an expected loss of $20,000.


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If Hengel used the percentage-of-completion method, what amount of gross profit (loss) would Hengel report in its 2002 income statement?

A) $22,500.

B) $(20,000).

C) $20,000.


Your answer: A was incorrect. The correct answer was C) $20,000.


Under the percentage of completion method, $40,000 of profit is recognized for project 1. 120,000 + 240,000 = 360,000 total costs; 240,000 / 360,000

eagles_dare13

If you expect to make a loss on a LT contract the entire amount of the loss has to be recognized immediately irrepsective of which revenue recognition method is used.