A company signed a contract on April 1, 2004 to build a satellite for $28,000,00

Question

A company signed a contract on April 1, 2004 to build a satellite for $28,000,000. Estimated costs for the contract are: year 2004 $ 5,600,000 year 2005 $11,2000,000, and year 2006 $5,600,000. Assume that the costst incurred coincide with expectations. Cash collections of the contract price are as follows: year 2004 $4,200,000 year 2005 $7,000,000 and year 2006 $16,800,000. Compute the income from contract for year 2005 and year 2006 under the cost recovery method and income from contract for 2005 and2006 under the installment method. Please show the work.

Explanation / Answer

They are really asking for the net income on the contract for year 5. Here's the way it works: Total Estimate at Completion (EAC) is the sum of the expected costs. So that equals: $5,600,000 + $11,200,000 + $5,600,000 = $22,400,000 This is ($22,400,000 / $28,000,000) 80% of the Total Contract Value of $28,000,000 The formula to determine revenue (R) for the year is this: R = $11,200,000 / .80 (where the $11,200,000 is the costs incurred on the contract for year 5.) This equals $14,000,000 Revenue of $14,000,000 less year 5 Costs of $11,200,000 equals your Net Income from this contract for year 5 $14,000,000 - $11,200,000 = $2,800,000 And there's your answer.

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