- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 3. Revenue Recognition in Special Cases
CFA Practice Question
A company entered into a three-year construction project with a total contract price of $5.3 million and an expected total cost of $4.4 million. The following table provides cash flow information relating to the contract (all figures in $):
Costs incurred and paid | 600,000 | 3,000,000 | 800,000
Amounts billed and payments received | 1,200,000 | 2,800,000 | 1,300,000
Item | Year 1 | Year 2 | Year 3
Costs incurred and paid | 600,000 | 3,000,000 | 800,000
Amounts billed and payments received | 1,200,000 | 2,800,000 | 1,300,000
If the company uses the percentage-of-completion method, the amount of revenue (in $) recognized in Year 2 will be closest to ______.
A. 2,901,333
B. 3,472,666
C. 3,616,636
Explanation: The revenue reported is equal to the percentage of the contract that is completed in that period, where percentage completion is based on costs. In Year 2, the percent completed is 3,000,000/4,400,000 = 68.2%, resulting in 68.2% x 5,300,000 = 3,616,636 revenue being recognized.
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