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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.

"Using Wiley for my CFA journey was by far the best option… I was able to pass on my first attempt.”– Moe E., Canada

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