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E18-34 (LO5) (Analysis of Percentage-of-Completion Financial Statements) In 2017, Steinrotter Construction Corp. began construction work under a 3-year contract. The contract price was \(1,000,000. Steinrotter uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2017, are shown below.

Balance Sheet
Accounts receivables		\)18,000
Construction in process	$65,000
Less: billings	(61,500)
Costs and recognized profit in excess of billings		3,500
Income Statement
Income(before tax) on the contract recognized in 2017		19,500

Instructions

(b) What was the initial estimated total income before tax on this contract?

Step by step solution

01

Definition of Income Tax

The fee charged on the income earned by a business or individual is known as income tax. Net income is calculated after adjusting the fees paid to the government.

02

Estimated Total Income Before Tax

Calculation of gross profit to revenue recognized ratio

$$\begin{gathered} \mathrm{Gross}\mathrm{profit}\mathrm{to}\mathrm{revenue}=\frac{\mathrm{gross}\mathrm{profit}}{\mathrm{revenue}} \\ =\frac{\$19,500}{\$65,000} \\ =0.30 \end{gathered}$$

Calculation of total income before tax:

$$\begin{gathered} \mathrm{Total}\mathrm{income}\mathrm{before}\mathrm{tax}=\mathrm{contract}\mathrm{price}×\mathrm{gross}\mathrm{profit}-\mathrm{revenue}\mathrm{ratio} \\ =\$1,000,000×0.30 \\ =\$300,000 \end{gathered}$$

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