Question

A company incurs the following costs on a particular project:

Year	2006	2007	2008	Total
Costs incurred ($ ‘000)	500	700	300	1,500

The total revenue from the project is expected to be $2,000,000. Under the percentage-of-completion method, the project’s net income in 2008 is closest to:

Group of answer choices

a. $300,000

b. $100,000

c. $600,000

Answer 1

In Percentage-of- completion method we have to first find out what is % of cost every year.

As we can see the total cost is 1,500,000 hence when we divide total cost with actual cost of that year , we will get cost percentage of the year. For e.g. 1,500,000/ 500,000 =33%.

We have total revenue of 2,000,000. Hence if we calculate 33% of 2,000,000 we will get 666,667 revenue for the year 2006. Similarly when we multiple total revenue of 2,000,000 with cost percentage of year 2008, we will get answer 400,000 as revenue pertaining to year 2008. Hence after subtracting revenue for year 2008 i.e. 400,000 with cost of year 2008 i.e. 300,000 we will get answer 100,000 net income for year 2008.

Years			Total
2006	2007	2008
500,000	700,000	300,000	1,500,000	Cost
33%	47%	20%		Cost %
666,667	933,333	400,000	2,000,000	Revenue
166,667	233,333	100,000		Net Income