When the revenue from a long-term contract is recognized over a period time, we

Question

When the revenue from a long-term contract is recognized over a period time, we recognizea portion of the total contract revenue based on how much of the work has been completed till the end of an accounting period. One way to determine the percentage of completion is to compute how much of the total estimated cost has been incurred. Think about the following scenarios. 1) A firm incurred $300,000 of construction cost during the first year of a long-term construction contract. At the end of year 1, the firm estimates that it needs $500,000 more to complete the construction. What is the total estimated cost to complete the construction based on year 1 information? a. b. Based on the cost numbers, what is the percentage of completion at the end of the first year? 2) The above firm incurred $200,000 of construction cost during the second year. At the end of the second year, the firm estimates that it needs another $400,000 to complete the construction. What is the total estimated cost to complete the construction based on both years' information? a. b. By the end of the second year, how much cost had been incurred on this contract? What is the percentage of completion at the end of the second year (rounding to the nearest 1 percent if necessary)? c.

Explanation / Answer

Solution :

1. (a) Total estimated cost = $300,000 + $500,000

= $800,000

(b) percentage of completion

= Cost incurred / total estimated cost x100

= $300,000 / $800,000 x100

= 37.50%

2(a) total estimated cost

= Cost incurred in both year + further estimated cost

= $300,000 + $200,000 + $400,000

= $900,000

(b) cost incurred by end of second year

= $300,000 + $200,000

= $500,000

(c) percentage of completion

= Cost incurred till second year / total estimated cost x100

= $500,000 /$900,000 x100

= 55.55%

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