# FSA Question

This one looks pretty straight forward. But the final outcome confused me. The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of: A) costs incurred in year 3 to total billings. B) costs incurred in year 3 to total estimated costs. C) total costs incurred to date to total billings to date. D) total costs incurred to total estimated cost. pls justify your answer.

My answer (whether right or not) would be: B) By process of elimination, I would eliminate A and C, because percentage-of-completion is based on ESTIMATED costs. In my opinion, D would be wrong, because total costs would have been used in years 1 and 2 and would be repetitive. B seems right, because you’re taking the costs in year 3 (keeping in mind the costs occurred in years 1 and 2) in comparison to the total estimated costs…

I think B For percentage of completed contract I think that estimated costs should be used. For income in year three costs in year three should only be used.

As far as I know, the formula is: (total cost incured to date/total estimated cost)*contract gross profit - gross revenue recognized to date. But you can easily use (Cost incured in year 3/ total estimated cost)*contract gross profit. So, is it B?

Yeah B

B Each year you recognize revenue equal to the % of cost in that year as a % of total expected costs.

I too choose B and wrong per Schweser. The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of: A) costs incurred in year 3 to total billings. B) costs incurred in year 3 to total estimated costs. C) total costs incurred to date to total billings to date. D) total costs incurred to total estimated cost. Your answer: B was incorrect. The correct answer was D) total costs incurred to total estimated cost. The percentage of completion method recognizes revenues in proportion to the proportion of expenses incurred. May be this a mistake from Schweser.

D If total cost incurred to date were greater than total estimated costs to complete, you must recognize the entire estimated loss in the current period.

Yeah this doesn’t sound right to me. Ans D is how you figure out the % complete. It would give you the ratio of the total revenue to recognize for the whole project. But for an individual year, you would use ratio B to get the income.

Based on map1’s equation, % of completion seems cumulative to me.

D its correct. The formula says: (total cost incured to date/total estimated cost) Therefore for sure its not B as it only takes into account the cost in year 3

That’s why you deduct at the end whatever profit has already been recognized.

Map1, it is the profit or Revenue that needs to be deducted to arrive at the revenuew for year 3?

The gross profit, not revenue. My bad!

this question was posted by xck2000 not too long ago, I remember the answer being D, but both B and D can be used, but the “method” calls for D.

B is wrong because this statement would not account for eventual increase in estimated costs which can (potentially) occur in year 3. D is the general approach which should be used. Milos

I say B

strangedays posted similar calculation based problem http://www.analystforum.com/phorums/read.php?11,707363 try solving it using the answer under B Milos

I would say D. the ratio we should use is D. we find the total profit. To get the yr.3 profit we will deduct yr.1&yr.2 profit from the total.