Question

in spring of this year, parmac engineering company signed a $192 million contract with the city of parkersburg, to construct a new city hall. parmac expects to construct the building within two years and incur expenses of $144 million. the city of parkersburg paid $48 million when the contract was signed, $96 million within the next six months, and the final $48 million exactly one year from the signing of the contract. parmac incurred $58 million in costs during the year and the rest in the following year to complete the contract on time. using the cost-to-cost method how much revenue should parmac recognize in the current year?

Answer 1

Using the cost-to-cost method, Parmac Engineering Company should recognize $77.34 million in revenue for the current year, calculated by applying the percentage of costs incurred (40.28%) to the total contract value of $192 million.

Step-by-step explanation:

To calculate the revenue Parmac should recognize in the current year using the cost-to-cost method, we need to determine the percentage of costs incurred relative to the total costs and apply that percentage to the total contract value. Parmac has incurred $58 million in costs during the current year out of the total $144 million in expenses expected for the project.

The percentage of completion can be calculated as follows:

Percentage of Completion = (Costs Incurred This Year / Total Expected Costs)

Percentage of Completion = ($58 million / $144 million)

Percentage of Completion = 0.4028 or 40.28%

Next, we apply this completion percentage to the total contract value to determine the revenue to be recognized:

Revenue Recognized This Year = Percentage of Completion * Total Contract Value

Revenue Recognized This Year = 40.28% * $192 million

Revenue Recognized This Year = $77.34 million

Therefore, Parmac should recognize $77.34 million in revenue for the current year according to the cost-to-cost method.