Question

Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue over time according to percentage of completion. Here are some facts:

Estimated Additional
Cost incurred Cost to Complete
2016 $ 3,000,000 $6,000,000
2017 500,000 6,500,000
2018 6,500,000 0
How much revenue would Robertson recognize in 2017?

Answer 1

Robertson Construction would recognize $4,200,000 in revenue in 2017 using the percentage of completion method based on the costs incurred relative to the total estimated costs.

Step-by-step explanation:

In 2017, to calculate the revenue recognized by Robertson Construction for the tunnel construction project, we used the percentage of completion method. Based on the provided information, the total costs incurred through 2017 are $3,500,000 (the sum of $3,000,000 in 2016 and $500,000 in 2017). The total estimated costs are $10,000,000 (the original $3,000,000, plus the additional $6,000,000 in 2016, and $1,000,000 in 2017). The percentage completed in 2017 is then 35% ($3,500,000 / $10,000,000). Since revenue is recognized in proportion to the costs incurred, Robertson would report $4,200,000 in revenue for 2017 ($12,000,000 total contract value times 35%).