|Author||Topic: Revenue Recognition|
I am struggling with the following question regarding revenue recognition:
An airplane manufacturing company routinely builds fighter jets for the U.S. armed forces. It takes fourteen months to build one jet, and the government pays for them in installments over the fourteen-month period. Which revenue recognition method should be used?
A) Installment sales method.
B) Completed contract method.
C) Percentage-of-completion method.
The answer mentioned as correct is C. The percentage-of-completion method is appropriate in this case because payment is assured when dealing with the U.S. government, and cost and price estimates are assumed reliable due to the ongoing and routine nature of the contract.
But why not A? As indivuals, we are not as reliable?
|i would imagine here that the most important clue in this one is not that its the US Government as much as the “routinely builds for X”. i havent looked back on this section for a few weeks, but if you look up what is required for percentage-of-completion then i think that will answer the question. I think because its routine we can assume costs are known..so if we know costs and its someone that we routinely build for, we can probably assume payments are reliable…and if we know those 2 things then we can use POC..i think..|