Delmonte Builders is currently working on a three-year building project for a client. Delmonte recognizes revenues based on the percentage of the work completed by the end of each year. The following table shows the project progress over the three-year period.
| Year | 1 | 2 | 3 |
| Total price of the three-year project | $10,000,000 | $10,000,000 | $10,000,000 |
| Percentage of the work completed | 18% | 75% | 100% |
| Cash received from the client | $3,500,000 | $3,500,000 | $3,000,000 |
REQUIRED: How much revenue should Delmonte recognize in Years 2 and 3? Explain.
Revenue to be recognised in percentage completion method is based on the percentage of work completed. Revenue to be recognised in the subsequent year will be reduced from the Previously recognised revenue as the percentage of completion is on cumulative basis.
Revenue to be recognised = Total price*percentage of completion
Year 1 = 10,000,000*18% = 1,800,000
Year 2 = Total price*percentage of completion - Previously recognised
= 10,000,000*75% - 1,800,000
= $5,700,000
Year 3 = 10,000,000 - 1,800,000 - 5,700,000
= $2,500,000
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