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Percentage of completion: profit recognition


One percentage of completion question, not revenue recognition but profit recognition.

[question removed by moderator]

I don’t understand why we cannot simply use the method normally used for revenue recognition: (periodic cost/total cost)* total estimated profit.

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Because the way they estimate percentage of completion is different. Instead of using cost to date over total cost, they use cost to date over estimated total cost. 

Year 1: 3,117,500/7,250,000 = 43%

Year 2: 3,117,500 + 2,582,500 / 7.600,000 = 75%

So between year 1 and year 2, 32% more in cost was incurred. 32% * 10,000,000 = 3,200,000. 

Profit: 3,200,000 - 2,582,500 = 617,500