Finance Controller CA. CS. CFA. CIFRS.
9017 Points
Joined October 2007
Revenue Recognition– Case Study -5
A Construction contractor has a fixed price contract for $11,500. The initial estimate of costs is $7,500 and the contract is expected to take four years. Cost will be incurred in the following manner,
In 1st yr its $3000, 2nd Yr it will be $1,500,
3RD yr it will be 1,875, 4th yr it will be $1,125.
In year two the contractor’s estimate of total costs increases to $8000. ($300 will be increased in the 3rd year and remaining in the last yr.
The contracts determines the stage of completion of the contract by comparing the costs of work performed to date with the estimated total costs.
Year-1 Year-2 Year-3 Year-4
Revenue agreed in contract 11,500 11,500 11,500 11,500
Contract costs incurred to date 3,000 4,500 6,675 8,000
Total Estimated Costs 7,500 8,000 8,000 8,000
Stage of Completion 40% 56.3% 83.4% 100%
To Date Prior yr Current Yr. Profit Margin
Year-1
Revenue(11,500 X 40%) 4,600 ------- 4,600
Costs (7,500 X 40%) 3,000 ------- 3,000 35%
Year-2
Revenue(11,500 X 56.3%) 6,475 4,600 1,875
Costs (8,000 X 56.3%) 4,500 3,000 1,500 20%
Year-3
Revenue(11,500 X 83.4%) 9,591 6,475 3,116
Costs (8,000 X 83.4%) 6,675 4,500 2,175 30%
Year-4
Revenue(11,500 X 100%) 11,500 9,591 1,909
Costs (8,000 X 200%) 8,000 6,675 1,325 30%