Question

On December 31 of the current year, State Construction Inc. signs a contract with the state of West Virginia Department of Transportation to manufacture a bridge over the New River. State Construction anticipates the construction will take three years.

The company’s accountants provide the following contract details relating to the project:

Contract price	$624	million
Estimated construction costs	$480	million
Estimated total profit	$144	million

During the three-year construction period, State Construction incurred costs as follows:

Year 1	$48	million
Year 2	$288	million
Year 3	$144	million

State Construction uses the cost-to-cost method to recognize revenue.
Which of the following represent the revenue recognized in Year 1, Year 2, and Year 3?

Select one:

a. $62 million, $312 million, $250 million

b. $62 million, $374 million, $187 million

c. $0 million, $0 million, $624 million

d. $60 million, $376 million, $188 million

e. None of these are correct.

Answer 1

Answer:

Option b. $62 million, $374 million, $187 million

Calculation:

Here we need to calculate the the revenue recognized in Year 1, Year 2, and Year 3.

For that we need to take the Construction costs incurred for the Year 1, Year 2, and Year 3. And then we need to calculate the Percentage to total costs.

	Year 1	Year	Year 3	Total
Construction costs incurred	48 million	288 million	144 million	480 million
Percentage to total costs	10%	60%	30%	100%

Then we need to find the revenue recognized in Year 1, Year 2, and Year 3 by multiplying the Percentage to total costs with the contract price.

Revenue recognized:

Year 1 = 10% x 624 million = 62 million

Year 2 = 60% x 624 million = 374 million

Year 3 = 30% x 624 million = 187 million