Percentage Completion Method

A project has estimated revenues of 10M and estimated cost of 7.5M. The following provides information on amound billed, cash recieved, and cost incurred for each year of the 3-year project: Amount Billed Year 1 = 3.0 Year 2 = 4.0 Year 3 = 3.0 Cash received Year 1 = 3.0 Year 2 = 5.0 Year 3 = 2.0 Cost incurred Year 1 = 2.0 Year 2 = 3.0 Year 3 = 2.5 Which of the following statements relating to cumulative balance sheets and income statement at year end is incorrect? A) Using the revenue recognition method that tends to smooth income, the company will recognize profit of $0.83 million in year three B) If ultimate payment is assured and the cost estimates are unreliable, the company will recognize profit of 1.5million in year 2 C) Considering this project only and using the percentage of completion method, total assets at the end of year 3 will be 2.5 million D) In comparison to using the percentage of completion method, using the completed contract method will result in lower income, total assets and shareholders equity during the construction period.

A) true: profit recongnized in year 3, profit is equal to [(10-7.5)/7.5]*2.5 = .83 B) false: under completed contract method (which should be used when cost estimates are unreliable) profits are not recognized until the project is completed C) true: assets = 10-7.5 = 2.5 D) true: completed contract method doesn’t recognize profits until project completion => lower income, lower equity and assets during the contruction period Answer is B

B is the answer… in CC Revenue Recognition Method, Profits are not recognized during the construction phase. - Dinesh S

ya, it’s b