Final answer:
Revenue recognition for cost reimbursement contracts is based on the incurrence of costs and the probability of reimbursement.
Step-by-step explanation:
Under the rules of revenue recognition for cost reimbursement contracts, revenue is recognized when the related costs are incurred and the reimbursement is probable and can be reliably estimated.
For example, let's say a company enters into a cost reimbursement contract with a client for a construction project. The company incurs various costs during the project, such as labor, materials, and equipment. As the costs are incurred, the company recognizes the corresponding revenue based on the reimbursement terms of the contract.
This method ensures that revenue is recognized in a manner that reflects the economic substance of the transaction, aligning the recognition with the costs being reimbursed.