Under the percentage of completion method

Question

Under the percentage of completion method, $400 of profit has been recognized in prior years on a project with a contract price of $5,000. Total costs incurred to date is $3,000. Estimated costs remaining at the end of the current year is $3,000. What profit or loss is recognized in the current year?

1. $1,000 loss 
2. $1,400 loss
3. $1,000 profit 
4. $900 profit

Answer 1

If any part of the first $3,000 spent occursed in the previous year, then there is not enough information to give an answer. For example, if you spent $3,000 in costs in the previous year, but in the current year you spend $3,000 and gained $4,600 ($5,000 minus $400), then you would be at a profit this year of $1,600

If however the $3,000 already spent occured in the current year, then with the total project cost being $6,000, and the agreed payment for you to receive on the project being $5,000, but you already received $400 of that $5,000 last year in stead, you would only get $4,600 this year versus your $6,000 in expenses. This would be a $1,400 loss.