CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

A company has undertaken a construction contract for $6,700,000, spread over three years with a projected gross profit of 40%. In the first quarter of the first year, the firm will book the following revenue and cost on the basis of the percentage-of-completion method:
A. revenues of $558,333 and production costs of $223,333
B. revenues of $558,333 and production costs of $335,000
C. revenues of $2,233,333 and production costs of $893,333
Explanation: According to the percentage-of-completion method, a firm books revenue in proportion to work completed. On a three-year contract, 1/12th of the work would be completed in the first quarter of the first year, assuming uniform production. On this basis, the company will book a revenue of $558,333 (= $6,700,000/12) and a cost of 60% of this amount or $335,000 ( = $558,333 x 0.6). The cost of 60% is arrived at on the basis of the 40% gross profit margin, by subtracting the latter from 100%.

User Contributed Comments 3

User Comment
CJPerugini It should be noted in the question that this is ASSUMING uniform production costs. Percentage complete is based on period cost and total cost, not time period and time frame.
adidas @CJPerugini, I agree, but I think we should assume so if there are no information given.
Inaganti6 @CJPerugini excellent advice. thank
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