Smile Operators Entered into a Contract to Build a Swimming

question 41

Multiple Choice

Smile Operators entered into a contract to build a swimming complex for $1,800,000. Construction commenced on July 1, 2020, with a planned completion date of December 31, 2022. A summary of the related accounting information is provided below: $$\begin{array} { | l | r | r | r | } \hline & \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } & \mathbf { 2 0 2 2 } \\\hline \text { Costs incurred during the year } & 400,000 & 500,000 & 650,000 \\\hline \text { Estimated costs to complete at year end } & 1,200,000 & 600,000 & 0 \\\hline \text { Billings during the year } & 360,000 & 440,000 & 1,000,000 \\\hline \text { Cash collections during the year } & 300,000 & 410,000 & 1,090,000 \\\hline\end{array}$$ How much gross profit would be recognized in 2021 if the company uses the completed contract method under ASPE?

• A)$0
• B)$120,000
• C)$220,000
• D)$250,000

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Definitions:

Collection Policy

A set of guidelines that a company follows to manage the collection of accounts receivable or outstanding invoices.

Aging Schedule

A methodical layout of a company's accounts receivable broken down by their due dates, typically used to manage and identify overdue accounts that may become uncollectable.

Credit Cost Curve

A graphical representation of the trade-off between the credit costs against the recovery rate or the likelihood of default.

Credit Period

The time frame between the purchase of goods on credit and the payment for those goods, offered by suppliers to buyers as an incentive.