The correct answer is: B. $\frac{1}{2}^{{\text{nd}}}{\text{of Notional Profit}} \times \frac{{{\text{Cash received}}}}{{{\text{Work certified}}}}$
The percentage of profit to be recognized on a construction contract is based on the percentage of work completed. When the completion stage of the contract is more than half, the profit to be credited to Profit and Loss account will be equal to one-half of the notional profit, multiplied by the ratio of cash received to work certified.
Notional profit is the estimated profit on the contract, based on the contract price and the estimated costs to complete the contract. Cash received is the amount of money that has been paid to the contractor for work that has been completed. Work certified is the amount of work that has been completed and certified by the owner.
The percentage of profit to be recognized is calculated as follows:
Percentage of profit to be recognized = (Percentage of work completed) x (Notional profit) / (Estimated costs to complete)
When the completion stage of the contract is more than half, the percentage of work completed is greater than 50%. Therefore, the percentage of profit to be recognized is equal to one-half of the notional profit, multiplied by the ratio of cash received to work certified.
For example, if the notional profit is $100, the estimated costs to complete are $80, the cash received is $60, and the work certified is $70, then the percentage of profit to be recognized is equal to:
Percentage of profit to be recognized = (Percentage of work completed) x (Notional profit) / (Estimated costs to complete)
= (100/100) x ($100) / ($80)
= $12.50
The profit to be credited to Profit and Loss account is equal to the percentage of profit to be recognized, multiplied by the cash received. In this example, the profit to be credited to Profit and Loss account is equal to:
Profit to be credited to Profit and Loss account = Percentage of profit to be recognized x Cash received
= $12.50 x $60
= $75.00