CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsMedium
A company recognized revenue of $500,000 for a construction contract using the percentage-of-completion method in Year 1. In Year 2, the company incurred additional costs of $300,000 and updated its estimate of total costs to $1,000,000. Total contract revenue is $1,200,000. What amount of revenue should the company recognize in Year 2?
- A$200,000
- B$720,000
- C$480,000
- D$360,000
Show answer & explanationAnswer & explanation
Correct answer: D. $360,000
To calculate revenue for Year 2, we first determine the total percentage of completion at the end of Year 2 and Year 1. Then, we apply these percentages to total contract revenue and subtract Year 1 recognized revenue from the cumulative revenue recognized through Year 2. The result is the revenue for Year 2.
Why the other options are wrong
- A. This might result from incorrectly calculating the percentage of completion or cumulative revenue.
- B. This might represent the cumulative revenue recognized through Year 2, not just the revenue for Year 2.
- C. This could arise from an error in calculating the cumulative revenue or the percentage of completion.
Percentage-of-Completion Method
A revenue recognition method for long-term contracts where revenue and expenses are recognized as work progresses, based on the proportion of completion.
- Recognizes revenue and profit over the life of the contract.
- Requires reliable estimates of costs to complete and progress.
- Used when the outcome of the contract can be reliably estimated.
Memory trick: Progressive Revenue: Build by Build, Profit's in the Yield.