Indiana Company began a construction project in 2024 with a contract price of $162 million to be received when the project is completed in 2026. During 2024, Indiana incurred $37 million of costs and estimates an additional $81 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed. Indiana: Note: Do not round intermediate calculations. Present final answer in millions, to 2 decimal places. Multiple Choice.
recognized $537.00 million loss on the project in 2024.
recognized no gross profit or loss on the project in 2024.
recognized $581.00 million loss on the project in 2024.
recognized $13.80 million gross profit on the project in 2024.
The Correct Answer and Explanation is:
Correct Answer:
recognized \$13.80 million gross profit on the project in 2024.
Detailed Explanation:
Indiana Company is using the percentage-of-completion method to recognize revenue over time. This method allows a company to recognize revenue and gross profit proportionally based on how much of the project has been completed during the accounting period.
Step 1: Calculate Total Estimated Cost of the Project
We are given:
- Costs incurred to date (2024): \$37 million
- Estimated costs to complete: \$81 million
So, the total estimated cost of the project =
👉 \$37 million + \$81 million = \$118 million
Step 2: Compute Percentage of Completion
Percentage of completion =
👉 Costs incurred to date / Total estimated cost
= \$37 million / \$118 million ≈ 0.3136 or 31.36%
Step 3: Recognize Revenue for 2024
Total contract revenue = \$162 million
Revenue recognized in 2024 =
👉 \$162 million × 31.36% ≈ \$50.80 million
Step 4: Recognize Gross Profit
Gross profit =
👉 Revenue recognized – Costs incurred to date
= \$50.80 million – \$37 million = \$13.80 million
Conclusion:
Indiana recognized \$13.80 million in gross profit in 2024 based on the percentage of project completed.
The percentage-of-completion method ensures that financial reporting reflects the actual progress of long-term projects. Since the project is expected to be completed profitably (total revenue \$162 million exceeds total estimated cost \$118 million), no loss is recognized. Instead, revenue and gross profit are recognized proportionally.
This also rules out the other answer choices:
- \$537.00 million and \$581.00 million losses are incorrect and excessive.
- Recognizing no profit or loss would be incorrect because the company has completed over 31% of the project and incurred costs, so it must report part of the revenue and profit.
✅ Final recognized gross profit: \$13.80 million in 2024.