REVENUE RECOGNITION PRINCIPLES Montgomery Construction signed a contract to buil
ID: 2419486 • Letter: R
Question
REVENUE RECOGNITION PRINCIPLES
Montgomery Construction signed a contract to build a warehouse for a customer. Construction covers a three-year period. The following data pertain to the contract and construction
Contract price is $2,500,000 and the payment of the contract is as follows:
• $250,000 at the signing of the contract on January 1, 2013
• $750,000 on December 31st, 2013 • $750,000 on December 31st, 2014
• $750,000 on December 31st, 2015 – the warehouse completed by this date
Estimated costs and actual costs are $1,500,000 which occurred as follows:
• $750,000 in 2013
• $500,000 in 2014
• $250,000 in 2015
1. Using the revenue recognition criteria, explain how Montgomery Construction should recognize the revenue from this contract and explain why?
2. Calculate the revenue, expense, and profit for each of the years using the Percentage of Completion method
Explanation / Answer
The percentage-of-completion method is generally the required method of financial and tax accounting of larger construction companies for long-term contracts. Its justification relies largely on the matching principle in accounting, where revenues and expenses are matched in the applicable accounting period.
The percentage-of-completion method attempts to recognize revenues and gross profit in the applicable periods of construction, and not soley in the period when the construction has been completed, as in the completed contract method. The degree of completion of the construction, i.e., the percentage-of-completion, is typically estimated by dividing the total construction costs incurred to date by the total estimated costs of the contract, or job.
% complete = Total construction costs to date/Total estimated costs of contract
Total estimated revenue is then multiplied by this percentage of completion to derive the total revenue that have been earned to date.
Calculation of Profit ,revenue and expense using Percentage calculation method
year % of completion Revenue to be recognised Payment received Profit Expense 2013 750000/1500000=50% 1500000*50%=750000 1000000 250000 750000 2014 500000/1500000=33.33% 1500000*33.33%=499950 750000 250050 500000Related Questions
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