Question

A company incurred the following costs in year 1 to fulfill a contract that is expected to take two years to complete:

• Equipment required to complete the contract: $150,000
• Salaries and wages incurred to satisfy contract requirements: $300,000
• Supplies and materials directly used: $20,000
• Allocation of supervisory salaries: $15,000
• Allocation of general administrative costs: $35,000

Other information:

The equipment was acquired for the contract, but will have other use to the company when the contract is complete. It is expected to have a ten-year useful life with no residual value. The revenue from the contract will be recorded at the end of two years, when control transfers (i.e., point in time).

How will the above costs be accounted for in year 1? Does the answer change if period of time criteria is met?

Answer 1

Revenue is recognized after determining stage of completion. Stage of completion can be reckoned in different ways based on nature of contract.

a) Proportion of cost incurred till date w.r.t. the total estimated cost of contract.

b) Survey of work performed, inspector will do a survey and issue a completion certificate mentioning how much work has been completed.

And expenses are recognized as and when incurred.

Costs to be accounted in Year 1

Particulars	Amt. (in $)
Salaries and wages	3,00,000
Supplies and materials	20,000
Supervisory salaries	15,000
General administration cost	35,000
Depreciation*	15,000
Total	3,85,000

* Depreciation = (Cost of equipment - salvage value)/ Useful life, using straight line method

= (150,000 - NIL)/ 10 = $ 15,000

As mentioned in question that revenue is to recognized at the end of 2 years when control transfers i.e. point in time, no revenue to be recognized in Year 1.

But if period of time criteria is met then revenue is recognized based on stage of completion of contract as explained above.