- 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

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**CFA Practice Question**

Trading Co. uses the percentage-of-completion method to recognize revenue. In 2000, Trading Co. agreed to construct a facility at a total contract price of $27.0 million and a total expected cost of $24.0 million. At the end of 1999 estimated costs have been changed to $25.0. Actual costs and cash inflow information are presented below (in $ millions):

What will Trading Co. report as net income in 1998, 1999, and 2000 respectively?

1998 | 1999 | 2000

A. 0.5875 | 0.5885 | 0.8240

B. 1.1163 | 1.6473 | 1.9364

C. 0.0587 | 0.5885 | 0.8240

**Explanation:**Cumulative Cost 1998 = (4.7/24.0)*100 = 19.5833%

Cumulative Revenue 1998= (4.7/24.0)*27.0 = 5.2875

Current Revenue 1998=(4.7/24.0)*27.0

Profit= Current Revenue - Cost = 0.5875

Cumulative Cost 1999 = (14.7/25.0)*100 = 58.8%

Cumulative Revenue 1999= (4.7/25.0)*27.0 = 15.876

Profit= Current Revenue - Cumulative Realized Profit - Cumulative Cost

= 15.876 - 0.5875 - 14.7 = 0.5885

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**User Contributed Comments**
10

User |
Comment |
---|---|

shasha |
cum cost at the end of '99 is based on adjusted total cost estimated. |

geet |
Equations are all messed up...answer is right though... |

Will1868 |
It is also the only answer that sums to the right rev. for the project. |

RichWang |
By the end of 1998, we know 1) the whole project Profit = 27M - 24M = 3M; 2) the completed part is 4.7 / 24 So Income is 4.7 / 24 * 3M = 0.5875 M Only A is correct. |

stratus |
The solution given for 1999 is messed up. They incorrectly used 4.7M for the year's incurred cost in the cumulative revenue calculation, while they should have used 10.0M. |

stratus |
Actually, I think the solution for 1999 is correct now. The numbers for 1998 and 2000 are definitely correct, and therefore to ensure revised gross profit of 2M, 1999's numbers must be as reported. |

wundac |
Year 2: The profit is now 2m the completed part is 14.7/25 Income accumulated since beginning of project is: 14.7/25*2 = 1.176 Income for 1999: 1.176-0.5885 = 0.5875 Same process for year 3 the profit is now 2m the completed part is 25/25 Income accumulated since beginning of project is: 25/25*2 = 2 Income for 2000: 2 - 0.5885-0.5875 = 0.824 |

ledyba |
actually, if you figured out that total gross profit for the 3 years is 2 (27-25), the only answer that sums 2 is A. |

cfastudypl |
Though calculating the percentages to arrive at the answer is good but you actually don't have to do that. You are already given the data that the total NI is $2m ($27M - 25) , just simply add the total NI across the three options and find that it is only option A that remains accurate. But note that some questions will have the correct answers across the options but only now want you to align the correct NI to the respective year, which is not the case for this question. More practice will help to know which approach to adopt when similar question(s) is/are presented. Thanks to AN! |

ecapocas |
It's a trick question. Note that all 3 answers have a different choice for the first year's number. Which means that if you can calculate that one correctly and you're sure the number is right, you do NOT need to go on and calculate revenue for the remaining years. |