Noah Construction Company is building a large complex for a contract price of $5,000,000. This is a three-year project and the requirements for recognizing revenue over time are met. The total estimated cost of the project is

$625,000

Explanation:

Calculation for how much income is recognized in Year 3

First step

Year 1 2 3

Cost incurred Till date

1000(1000+1500)2500(2500+1250)3750

Estimated cost to complete

300015000

Total cost of contract

400040003750

Second step

Using this formula to calculate for the percentage of completion for each year

Percentage of completion =Cost incurred till date /Total cost

Let plug in the formula

Yeat 1= 1,000/4,000 =25%

Year 2= 2,500/4,000 =62.5%

Year 3=3,750/3,750 =100%

Last step

Year 123

Contract price500050005000

Less:Total cost(4000)(4000)(3750)

Gross profit100010001250

Percentage of completion

25%62.5%100%

Gross profit to be recognized till date(1000*25%)=250(1000*62.5%)=625(1250*100%)=1,250

Less:Gross profit recognized till prior year

0-250-625

Gross profit to be recognized in current period

250375625

Hence;

Year 1 Gross profit is $250,000

Year 2 Gross profit is $375,000

Year 3 Gross profit is $625,000

Therefore the amount of income recognized in year 3 will be $625,000

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