Chegg Megan Corp. recognizes revenue over time to account for long-term contracts. At the date the contract is signed, the price is $600,000 and the expected costs to complete the contract are $400,000. The following information is available: What is the amount of gross profit or loss that is recognized in year 2

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14-09-2020
Business

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Chegg Megan Corp. recognizes revenue over time to account for long-term contracts. At the date the contract is signed, the price is $600,000 and the expected costs to complete the contract are $400,000. The following information is available: What is the amount of gross profit or loss that is recognized in year 2

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Parrain Parrain · Answer 1 · 2020-09-18T03:14:03+02:00

Answer: -$30,000

Explanation:

Gross profit for the year is calculated by multiplying the expected profit to be made by the cost - to -cost ratio and then subtracting the gross profit expected in the previous year.

Cost to cost ratio = Costs incurred till date / Costs to be incurred in total

Year 1

Cost to cost ratio = 200,000 / ( Costs incurred + Cost to complete)

= 200,000 / (200,000 + 200,000)

= 50%

Gross profit = 50% * ( Price - estimated cost to complete)

= 50% ( 600,000 - 400,000)

= $100,000

Year 2

Cost to cost ratio = 350,000 / ( Costs incurred + Cost to complete)

= 350,000 / (350,000 + 150,000)

= 350,000 / 500,000

= 70%

Gross profit = 70% * ( Price - estimated cost to complete) - Previous Gross

= 70% ( 500,000 - 400,000) - 100,000

= -$30,000

Gross Loss of $30,000 in Year 2

Note; Ignore the first comment