CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

A company signs a long-term construction contract for $10 million. In the first year of the contract, costs to date totaled $4 million, of an estimated $8 million in costs. The company received cash payments of $7 million. The gross profit recognized in year one under the percentage of completion method would be ______.
A. $0
B. $1 million
C. $3 million
Explanation: Percentage-of-completion recognizes gross profit on a percentage basis. Since half the contract is completed ($4 million/$8 million), half the gross profit can be recognized. Gross profit is $10 million less estimated costs of $8 million = $2 million/2 = $1 million.

User Contributed Comments 10

User Comment
samhoklee 4/8x10=5mil. 7-5=2mil?? B?
johnsk samhoklee: you forgot to divide it by 2 and half of the contract is completed.
geet (4/8)*10 mil= 5 million
5million - 4 million = 1 million
Terry 10 million - 8 million = 2 million total expected gross profit

2 million * % of completion (4M/8M) = 1 million
bokica agree with terry
treakj Cash payment ammount is there just to make us confused.
RCapistrano This how I systematically attack this problem:

Find: Gross Profit for YR 1 (under %completed method)

Gross Profit = Revenue - Cost
Revenue = (%Completed)*(Contract Price) = (4m/8m)(10m) = 5m
Cost for Y1 = 4m

So?
Gross Profit = 5m - 4m = 1m
azramirza agree with geet
cfaeater Cash payment is a red herring here!
endurance COGS sets the game: 50 percent of cost > 50 percent of contract size > 5-4=1
(10 * 0.5)-(8*0.5)=gross profit=1
You need to log in first to add your comment.