5.2 Recognition of Revenue over Time

Question 1

A construction company recognizes revenue from construction contracts over time using the input method based on costs incurred. It reports the following:

Construction costs:
* Year 1: $100
* Year 2: $200

Estimated cost to complete at year-end
* Year 1: $300
* Year 2: $0

The contract price is $1,000. What is the profit recognized in Year 2?

A. $400
B. $800
C. $150
D. $550

Answer 1

D. $550

At the end of Year 1, total cost was expected to be $400, and estimated total profit was 1,000 price - estimated total cost = $600.

Thus, the amount of profit recognized in Year 1 was
$600 x ($100 cost incurred / 400 estimated total cost) = $150.

The project was completed in Year 2 at an additional cost of $200. Actual profit was therefore $1,000 - 300 actual total cost = $700.

Profit recognized in Year 2 is $700 total - $150 recognized in Year 1 = $550.

Question 2

Ashke Co. recognizes construction revenue and gross profit using the input method based on costs incurred to recognize revenue from a performance obligation satisfied over time. During Year 1, a single long-term project was begun, which continued through Year 2. Information on the project follows:

Accounts receivable from construction contract
Year 1: $100,000
Year 2: $300,000
Annual construction costs
Year 1: 105,000
Year 2: 192,000
Cumulative gross profit and costs incurred
Year 1: 122,000
Year 2: 364,000
Partial billings on contract
Year 1: 100,000
Year 2: 420,000

Gross profit recognized on the long-term construction contract in Year 2 should be

A. $120,000
B. $228,000
C. $108,000
D. $50,000

Answer 2

D. $50,000

Costs incurred through Year 2 =105,000 + 192,000 = 297,000

Thus, gross profit recognized in Year 1 and Year 2
= 364,000 - 297,000 cumulative costs = 67,000

Because gross profit of $17,000 was recognized in Year 1 ($122,000 - 105,000 of costs), $50,000 (67,000 - 17,000) should be recognized in Year 2.