- CFA Exams
- CFA Exam: Level I 2021
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 3. Revenue Recognition in Special Cases
CFA Practice Question
Cruise Builders Inc., begins building a new ship for Happiness Cruise Lines in 2015. The project price is $12,000,000. The estimated total cost is $9,000,000 over three years. Here is the information for 2015 only: costs incurred, $3,000,000; estimated completion costs, $6,000,000; billings, $2,500,000; cash collected, $1,500,000. Which one of the following is the correct cost ratio to use in computing the profit for 2015 under the percentage-of-completion method?
B. 42%
C. 50%
A. 33%
B. 42%
C. 50%
Correct Answer: A
The correct cost ratio is $3,000,000 current year costs/$9,000,000 estimated total costs = 33%.
User Contributed Comments 7
| User | Comment |
|---|---|
| mrushdi | pls explain what is estimated cost to completion is 8 Mn. Then how the ratio is computed. |
| Oarona | The total estimated cost of the project is 9Mn not 8Mn, therefore the cost ratio is $3Mn/9Mn=33%. Remember % of completion=current cost incurred/total estimated cost. |
| cleopatraliao | whats the estimated completion cost doing here???why not use that one?? |
| leftcoast | estimated completion cost is an estimate of how much cost is remaining until the project is completed. Estimated total cost - costs incurred = estimated completion costs. |
| johntan1979 | So tricky! Keyword is "total". |
| Shaan23 | To take it a step further we would use the 2.5M and not the 1.5million to calculate the Rev Recognized to date... |
| fzhou | ugh "total" vs "completion" |