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The Lao Construction Company recognizes revenue over time according to percentage of completion for its long-term construction contracts. In 2024, Lao began work on a construction contract. Information on this contract at the end of 2024 is as follows: Cost incurred during the year = $ 1,500,000 Estimated additional cost to complete = $6,000,000 & Gross profit recognized in 2024 = $250,000. What is the contract price (total revenue) on this contract?

Answer :

The contract price is $8,750,000

What is contract price?

Contract price means the amount Lao Construction Company charged the customer for total contract's execution.

We need to ascertain the percentage completion of the project first and foremost, which is the total costs incurred to date divided by the contract's total costs.

cost incurred to date=$ 1,500,000

total contract's cost=cost incurred to date+ expected future costs

total contract's cost=$1,500,000+$6,000,000

total contract's cost=$7,500,000

% completion=$1,500,000/$7,500,000

% completion=20%

gross profit recognized=(contract price*% completion)-costs incurred till date

gross profit recognized=$250,000

contract price=unknown(assume it is X)

% completion=20%

cost incurred to date=$ 1,500,000

$250,000=(20%*X)-$1,500,000

$250,000+$1,500,000=0.20X

$1,750,000=0.20X

X=$1,750,000/0.20

X=$8,750,000

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