25.07.2022 - 19:50

# Klondike Construction Company is building a highway under a three-year construction contract. Klondike will receive $11,200,000 for building five miles of highway. Klondike estimates that it will incur$10,000,000 of costs before the contract is completed

Question:

Klondike Construction Company is building a highway under a three-year construction contract. Klondike will receive $11,200,000 for building five miles of highway. Klondike estimates that it will incur$10,000,000 of costs before the contract is completed. At the end of year one, Klondike had incurred $3,000,000 of contract costs. 1. How much income from the contract must Klondike report for year one? 2. Assume Klondike incurs an additional$5,000,000 of costs during the second year. How much income should be reported for that year?

3. If Klondike incurs another $2,500,000 of costs in the third and final year of the contract, how much income must Klondike report for the third year? 4. Will Klondike receive or pay look-back interest? Answers (1) • April 14, 2023 в 23:36 1. Klondike must report$2,200,000 of income for year one. This is calculated by subtracting the cost incurred in year one ($3,000,000) from the total estimated costs ($10,000,000) and dividing the result by the total contract price ($11,200,000): (($10,000,000 - $3,000,000)/$11,200,000) x $11,200,000 =$7,000,000 (total estimated profit) - $4,800,000 (profit from years two and three) =$2,200,000 (profit from year one). 2. Klondike should report $3,600,000 of income for the second year. This is calculated by subtracting the total costs incurred in years one and two ($8,000,000) from the total estimated costs ($10,000,000) and dividing the result by the total contract price ($11,200,000): (($10,000,000 -$8,000,000)/$11,200,000) x$11,200,000 = $2,000,000 (total estimated profit from years two and three) -$400,000 (profit from year three) = $1,600,000 (profit from year two) +$2,000,000 (profit from year three) = $3,600,000 (total profit from years two and three). 3. Klondike must report$400,000 of income for the third year. This is calculated by subtracting the total costs incurred in all three years ($10,500,000) from the total estimated costs ($10,000,000) and then subtracting the total estimated profit ($2,000,000) from the result: (($10,000,000 - $10,500,000)/$11,200,000) x $11,200,000 = -$500,000 (total estimated loss from years one to three) - $1,600,000 (profit from year two) = -$2,100,000 (total estimated loss from year one to three) + $2,000,000 (total estimated profit from years two and three) = -$100,000 (total estimated loss from year one to three) + $500,000 (profit from year three) =$400,000 (profit from year three). 4. It is unclear whether Klondike will receive or pay look-back interest, as this depends on the terms of the contract and any applicable regulations or laws. Look-back interest is typically used to adjust the contract price or payment schedule if the actual costs or progress deviate from the original estimates, and can result in either a payment to the contractor or the client.
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