Question

Dowell Manufacturing contracts to produce bumper cars for Five Flags Parks. Under the terms of the contract, Five Flags will pay Dowell a total of $60,000 when bumper cars are delivered six months later, and Five Flags can cancel the contract but must pay Dowell for work completed. Dowell believes that, if Five Flags cancelled the contract, Dowell could not sell the bumper cars to another park. As of December 31, 2020, the job is 80% complete. How much revenue should Dowell recognize in 2020 for this contract?

	a.	$0
	b.	$12,000
	c.	$30,000
	d.	$48,000
	e.	$60,000

Answer 1

d: $48000

The work is 80% complete and the payment has become due. The terms of contract state that Five Flags must pay for any work which is completed. Since the payment is accrued the same must be booked to that extent. A note to that effect must be added in the books of accounts to depict the contingency.

Option a is invalid because the revenue must be books as and when it is acrued. Other options are invalid since there is no basis of calculating these values.