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In: Accounting

Belgium Co. is constructing a tunnel for 800 million. Construction began in 2011 and is estimated...

Belgium Co. is constructing a tunnel for 800 million. Construction began in 2011 and is estimated to be completed in 2016. At December 31, 2013, Belgium has incurred costs totaling 356 million with 85 million of that incurred in 2013, 143 in 2012, and 128 in 2011. Belgium received 356 million in total progress payments to date but future activity is tenuous and its cost numbers are highly uncertain. What amount of revenue should Belgium Co. recognize for the year ended December 31, 2013?

A. No revenue should be recognized until the contract is completed in 2016.
B. 356 million.
C. 271 million.
D. 85 million.

Solutions

Expert Solution

Belgium Co. is constructing a tunnel for 800 million. i.e. the construction price to be received by the company is 800 million.

The company is highly uncertain about the cost numbers and future activities of the construction of the tunnel. Therefore the co. cannot (percentage) stage of completion method for recognizing the revenue from the contract.

There are no cost-plus commission rates provided in the contract. Hence cost-plus margin method is also not used for recognizing the revenue.

As the company is uncertain about the future cost of the contract the company should recognize revenue based on cost of construction of the tunnel.

Since the company incurred 85 million in the year ending December 31, 2013 it should recognize option D. 85 million as its revenue.

(Alternatively, the question is silent about recognition of revenue in earlier years. If the company has not recognised any revenue in the year 2011 and 2012, then the comaony should recognize a total of option B. 356 million in the year ending 31 dec 2013.)

Option A. No revenue to be recognise stands incorrect, as accouting is done on the bases of accural and matching concept of expenses and revenue. If we record expense related to a contarct in the current year, than we should also record the revenue relating to that contract.

Option C 271 Million also stands incorrect as it ignores the expense and revenue incurred in the current year.

ekkarill92 answered 2 years ago
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