- 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 signs a long-term construction contract for $10 million. In the first year of the contract, costs to date totaled $4 million, of an estimated $8 million in costs. The company received cash payments of $7 million. The gross profit recognized in year one under the percentage of completion method would be ______.
A. $0
B. $1 million
C. $3 million
Explanation: Percentage-of-completion recognizes gross profit on a percentage basis. Since half the contract is completed ($4 million/$8 million), half the gross profit can be recognized. Gross profit is $10 million less estimated costs of $8 million = $2 million/2 = $1 million.
User Contributed Comments 10
| User | Comment |
|---|---|
| samhoklee | 4/8x10=5mil. 7-5=2mil?? B? |
| johnsk | samhoklee: you forgot to divide it by 2 and half of the contract is completed. |
| geet | (4/8)*10 mil= 5 million 5million - 4 million = 1 million |
| Terry | 10 million - 8 million = 2 million total expected gross profit 2 million * % of completion (4M/8M) = 1 million |
| bokica | agree with terry |
| treakj | Cash payment ammount is there just to make us confused. |
| RCapistrano | This how I systematically attack this problem: Find: Gross Profit for YR 1 (under %completed method) Gross Profit = Revenue - Cost Revenue = (%Completed)*(Contract Price) = (4m/8m)(10m) = 5m Cost for Y1 = 4m So? Gross Profit = 5m - 4m = 1m |
| azramirza | agree with geet |
| cfaeater | Cash payment is a red herring here! |
| endurance | COGS sets the game: 50 percent of cost > 50 percent of contract size > 5-4=1 (10 * 0.5)-(8*0.5)=gross profit=1 |