- 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 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 |
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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 |