Question

At the beginning of 2012, Massachusetts Road Construction entered into a contract to build a road for the government. Construction will take 3 years. The following information as of December 31st, 2012 is available for the contract:

Total revenue according to contract	$15,000
Updated estimated cost in 2013-2014 period	$7,200,000
Cost incurred during 2012	$4,800,000

Assume that the company estimates percentage complete based on costs incurred as a percentage of total estimated costs. Under the Percentage-of-Completion method, how much revenue will be reported in 2012?

$6,000,000

Answer 1

To find out revenue to be recognised under Percentage of Completion method we will follow the steps shown below

Step 1 : Calculation of Degree of Completion

(Cost Incurred/ Total Cost) * 100

Total Cost = Cost Incurred + Cost Yet to be incurred

Therefore Total Cost = $4,800,000 + $7,200,000

=$12,000,000

Therefore Degree of Completion

=$4,800,000 / $12,000,000

= 40%

Step 2 : Revenue to be Recognised

= Degree of Completion * Total Revenue according to Contract

As per data given in the sum the Revenue to be Reported in 2012 would be

40% of $15,000

= $6000

Thus Revenue of $6000 would be reported as revenue in 2012.

Note : At the end of the sum $6,000,000 is given which might imply that the Total Revenue according to Contract would be $15,000,000 and not $15,000 (might be due to typing error)

Then Revenue to be Recognised as per above Note would be

40% of $15,000,000

=  $6,000,000

Revenue of $6,000,000 would be reported as revenue in 2012.