Lake construction company has consistently used the...

Lake Construction Company has consistently used the percentage of completion method in recognizing income. During 2021, Lake entered into a fixed-price contract to construct an office building for P10,000,000. Information relating to the contract is as follows: As of December 31, 2021: - Percentage of completion: 20% - Estimated total cost at completion: P7,500,000 - Income recognized (cumulative): P8,000,000 Contract costs incurred during 2022 were: - P3,200,000 - P3,300,000 - P3,500,000 - P4,800,000 Gross profit recognized during 2022 amounted to: - P100,000 - P300,000 - P600,000 - P700,000

Transcript

00:02 Hello, in this video, we're going to solve for the contract cost incurred during the year 2022 of lake construction company.

00:12 That's the first requirement, contract cost.

00:15 The second requirement was we're going to compute for the gross profit to be recognized in the same year.

00:22 Now, let us solve for the contract cost incurred during 2022.

00:29 Before that, do so first for the contract cost in the year 2021, which is for this year we have an estimated total cost at completion of 7 .5 million.

00:45 Just simply multiply this by the percentage of completion, and this will be your contract cost for year 2021.

00:58 So 7 .5 million times 20 % we have 1 .5 million.

01:09 Now how about for year 2022? for year 2022 we have an estimated total completion total cost of $8 million multiplied by the 60 % percentage of completion and we will get 4 .8 million.

01:40 But take note that the 8 million cost at completion is a cumulative figure.

01:50 Therefore, the 4 .8 million contract cost is still cumulative.

02:00 So we need to deduct out from this figure the previous contract cost of 1 .5 million.

02:07 So we have 4 .8 million minus 1 .5 million.

02:13 We will get 3 .3 million.

02:20 And this is the answer for the first requirement.

02:24 We have a contract cost of 3 .3 million to be recognized in year 2022.

02:39 Now, let us solve for the second requirement.

02:43 The second requirement asks for the gross profit to be recognized during 2022.

02:50 Now, take note that your gross profit is computed as your revenue less your contract costs.

03:13 Okay, so let us compute first for your revenue on year 2021.

03:21 For year 2021, we have a, i'm sorry, we have a contract price of 10 million for the whole contract.

03:31 This is for the whole contract, by the way, and this is your revenue for the whole project.

03:38 So we have 10 million, but take note that you need to allocate a portion only for year 2021...

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