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Suppose a company has a contract to construct a building for a total sales price of $60 million. The building will take an estimated three years to complete, with a total estimated cost of $50 million. If the company incurs costs of $20 million in Year 2, how much revenue and profit should be recognized in Year 2 if the percentage of completion method is used

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Answer:

$24 million

Explanation:

During year 2, the percentage of completion = $20 million / $50 million = 40%.

Since the building advanced 40% during that year, then the company must recognize 40% of total contract price as revenue for this year = 40% x $60 million = $24 million.

The percentage of completion method is not cumulative, it is calculated on a year to year basis.

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