Red Builders agrees to construct a new building for Blue Co. for a total contract price of $6,000,000. The estimated construction costs at inception was $4,000,000. The construction project was completed after two years. Below are the actual costs for years 1 and 2:
Description Cumulative
Year 1 Year 2
Cost incurred to date 1,200,000 2,500,000
Estimated additional costs to complete 3,600,000 2,100,000
Billings 1,050,000 2,300,000
Cash Collections 1,000,000 1,900,000
Red has determined that this contract qualifies for revenue recognition over time (as opposed to upon completion). As a result, Red Builders should have recognized profit at the end of year 1 in the amount of:
a. $300,000
b. $600,000
c. $1,050,000
d. $1,000,000
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