CSLB Law & Business ExamBusiness FinancesHard
A contractor is working on a long-term project with a total contract price of $300,000 and an estimated total cost of $150,000. To date, $90,000 in costs have been incurred. Using the percentage-of-completion method, how much revenue should be recognized so far?
- A$150,000
- B$180,000
- C$90,000
- D$210,000
Show answer & explanationAnswer & explanation
Correct answer: B. $180,000
Percent complete = Costs incurred ÷ Estimated total cost = $90,000 ÷ $150,000 = 60%. Revenue recognized = 60% × $300,000 contract price = $180,000.
Why the other options are wrong
- A. This equals the total estimated cost, not the revenue based on percent complete.
- C. This is only the cost incurred, not the revenue recognized under this method.
- D. This overstates revenue beyond the actual percentage of work completed.
Percentage-of-Completion Method
An accounting method for long-term contracts that recognizes revenue based on the proportion of costs incurred relative to total estimated costs.
- Percent complete = Costs to date ÷ Total estimated costs
- Revenue recognized = Percent complete × Total contract price
- Commonly used for multi-month construction projects
Memory trick: Costs so far divided by total costs tells you how much of the pie is done.