Percentage of completion method, a practice problem from a CPA book

This is an old problem about the percentage-of-completion (p-o-c) method that I have seen in two different books I'm studying out of for the FAR, and it goes like this:

1. Some Co. recognizes construction revenue and expenses using the percentage-of-completion method. During 2010, a single long-term project commenced, which concluded at the end of 2011. Information on the project follows:

	2010	2011
Accounts receivable from contract	$100,000	$300,000
Construction expenses	105,000	192,000
Construction in progress	122,000	364,000
Partial billings on contract	100,000	420,000

Profit recognized from the long-term construction contract in 2011 should be:

a. $50,000
b. $108,000
c. $128,000
d. $228,000

The question is asking us to calculate 2011 Profit. Normally profit for a construction contract calculated under the p-o-c method would be calculated using this formula:

Profit  =

Σ CTD Σ CTC

(Contract price – Σ CTC) – PY Profit

Where:
Σ CTD is Total Costs To Date;
Σ CTC is Total Expected Costs To Completion;
Contract Price is the total price of the contract;
and PY Profit is the profit recognized in Prior Years.

It may seem scary, but this is the easy way to calculate profit under the p-o-c method. Unfortunately there isn't enough information to use this equation, so we have to calculate 2011 profit indirectly.

Under the p-o-c method, three things affect the Construction in Progress (CIP) account: 1) to record accumulated costs, 2) to record recognition of interim revenue and expenses, and 3) to close the CIP and Billings account at the completion of the project. In this problem we only have to worry about 2): recording recognition of interim revenues and expenses. Expenses and revenues both get debited to CIP. Here's a t-account:

CIP (similar to WIP)

2010 Expenses	105,000
2010 Profit	x0
12/31/2010 Balance	122,000
2011 Expenses	192,000
2011 Profit	x1
12/31/2011 Balance	364,000

We don't really care about x₀ in this problem, but for the record, it's $17,000. It's x₁ we're after, and that's $50,000 (364,000 – 192,000 – 122,000). Your answer is a.