CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsMedium
A construction company enters into a contract to build a custom bridge for a municipality. The contract price is $10,000,000. The company estimates total costs to be $8,000,000. In Year 1, the company incurs costs of $2,000,000 and estimates additional costs to complete the project of $6,000,000. Under ASC 606, what amount of revenue should the company recognize in Year 1 if the performance obligation is satisfied over time?
- A$2,500,000
- B$8,000,000
- C$2,000,000
- D$10,000,000
Show answer & explanationAnswer & explanation
Correct answer: A. $2,500,000
To recognize revenue over time, calculate the percentage of completion based on costs incurred relative to total estimated costs. Then apply this percentage to the total contract price to determine revenue for the period.
Why the other options are wrong
- B. This is the total estimated cost, not the revenue recognized in Year 1.
- C. This represents only the costs incurred, not the revenue earned.
- D. This is the total contract price, not the revenue recognized in Year 1.
Revenue Recognition - Over Time
Revenue is recognized over time when a performance obligation is satisfied continuously, typically measured by progress towards completion.
- Used when the customer simultaneously receives and consumes the benefits.
- Common in long-term contracts like construction.
- Progress is often measured using cost-to-cost or output methods.
Memory trick: Progressive Pay for Prolonged Projects