Question

22) Noah Construction Company is building a large complex for a contract price of $5,000,000 This is a three-year project and the requirements for recognizing revenue over time are met. The total estimated cost of the project is $4,000,000 and the following information is available: K$ in thousands) Costs incurred Estimated completion costs Billings Cash collected Year 1 $ 1,000 $ 3,000 $ 750 $ 500 Year 2 $ 1,500 $ 1,500 $ 1,750 $ 1,500 Year 3 $ 1,250 $ 0 $ 2,500 $ 3,000 Using the percentage-of-completion method of revenue recognition, how much income is recognized in Year 3? A) $375,000 B) $625,000 C) $1,000,000 D) $1,250,000

Answer 1

Correct option is "B"-625000

	Year 1	2	3
Cost incurred Till date	1000	1000(till year 1 )+1500=2500	2500 (till year 2) +1250=3750
Estimated cost to complete	3000	1500	0
Total cost of contract	4000	4000	3750
% of completion [cost incurred till date /Total cost ]	1000/4000 25%	2500/4000 62.5%	3750/3750 100%

	Year 1	2	3
Contract price	5000	5000	5000
Less:Total cost	(4000)	(4000)	(3750)
Gross profit	1000	1000	1250
% of completion	25%	62.5%	100%
Gross profit to be recognized till date	1000*25%=250	1000*62.5%=625	1250*100%=1250
Less:Gross profit recognized till prior year	0	-250	-625
Gross profit to be recognized in current period	250	375	625