Question

The University signed a construction contract with a builder in 2022 to construct a new student housing building. The contract is fixed price with a total contract value of $15 million and estimat total costs of $9 million with a 3-year estimated construction period. Assuming the builder uses t cost-to-cost method of revenue recognition for multi-year contracts, how much revenue would th builder recognize in year 1 if the total costs incurred in year 1 were $1.5 million?

Answer 1

Under the cost-to-cost method, the builder would recognize 16.67% of the contract value, which is $2.5 million, in revenue for year 1 based on the costs incurred.

Step-by-step explanation:

The question pertains to the cost-to-cost method of revenue recognition under a fixed price contract. The revenue recognition in year 1 for the builder who has signed a $15 million contract, assuming $1.5 million costs were incurred in the first year and with total estimated costs of $9 million, is calculated as follows:

The percentage of completion is calculated by dividing the costs incurred by the total estimated costs: $1.5 million / $9 million = 1/6 or approximately 16.67%. The builder would then recognize revenue based on this percentage of the total contract value: 16.67% of $15 million = $2.5 million. Therefore, the builder would recognize $2.5 million in revenue for year 1.