ExpertHard1 markMultiple Choice
Area III: Select Transactionspercentage of completionASC 606construction contractsrevenue recognition
CPA · Question 27 · Area III: Select Transactions
Riverside Corp. enters into a contract to construct a building for $3,000,000. The contract is expected to take 3 years to complete. At the end of Year 1:<br/>- Costs incurred to date: $900,000<br/>- Estimated costs to complete: $1,800,000<br/>- Billings to customer: $800,000<br/>- Cash collected: $750,000<br/><br/>Using the percentage-of-completion method, how much revenue should Riverside recognize in Year 1?
Riverside Corp. enters into a contract to construct a building for $3,000,000. The contract is expected to take 3 years to complete. At the end of Year 1:<br/>- Costs incurred to date: $900,000<br/>- Estimated costs to complete: $1,800,000<br/>- Billings to customer: $800,000<br/>- Cash collected: $750,000<br/><br/>Using the percentage-of-completion method, how much revenue should Riverside recognize in Year 1?
Answer options:
A.
$800,000
B.
$900,000
C.
$1,000,000
D.
$750,000
How to approach this question
Calculate percentage complete as costs incurred to date divided by total estimated costs (incurred + estimated to complete). Multiply this percentage by total contract price to determine cumulative revenue to be recognized.
Full Answer
C.$1,000,000✓ Correct
$1,000,000
Under ASC 606 (and previously ASC 605-35), percentage-of-completion method recognizes revenue based on progress toward completion. Progress = $900,000 ÷ ($900,000 + $1,800,000) = 33.33%. Revenue = $3,000,000 × 33.33% = $1,000,000. This method matches revenue with the progress of work performed.
Common mistakes
Using billings or cash collections for revenue recognition, not including estimated costs to complete in total costs, or applying percentage to costs instead of contract price
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