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Krystal has been approached by a junior manager from a company serviced by Krystal’s firm. This...

Krystal has been approached by a junior manager from a company serviced by Krystal’s firm. This manager wants Krystal to explain a revenue amount on his company’s newly issued interim statements, compiled by Krystal, for the company’s 3rd quarter. The revenue amount on the income statement does not include the entire amount to be earned on a construction project to be completed by the end of the year. The manager wanted to know why Krystal failed to recognize all of the revenue from the job in progress even though all significant work had not been completed on the job.

Should Krystal have included all of the revenue from the construction job on the income statement? Why or why not?

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Revenue recognition on construction contracts The revenue arising from a construction contract is generally recognised in two ways, as listed below: (a) Percentage of completion method: This method is employed for revenue recognition when the outcome of the contract can be estimated with a reasonable degree of estimation. It states that the revenue and costs of the contract should be recognized in proportion of the completion of the contract. The outcome is said to be estimated reliably if the contractor is able to estimate the amount of total revenue percentage of completion and the amount of costs required to be incurred to complete the contract. (b) Cost recovery method If the outcome of a contract cannot be reliably estimated, cost recovery method is used to recognize the revenue on the contract. Under this method, no profit is recognized until completion. The revenue from contract is recognized only to that extent to which the costs incurred are expected to be recovered. However, the loss probable arising on any construction contract is recognized as and when it becomes Accordingly, in the given case, if the entity is following percentage of completion method, Krystal should recognize the amount of revenue arising from contract. But if the outcome of contract cannot be estimated then no revenue should be recognized for the work not yet completed

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