To determine the portion of the total contract price that would be recognized as revenue in 2020 and 2021 using the percentage-of-completion method, we need to consider the costs incurred and the progress made towards completing the contract in each year.
Let's assume the following information:
- Total contract price = $2,159,000
- Costs incurred in 2020 = $900,000
- Costs incurred in 2021 = $1,200,000
- Estimated total costs to complete the contract = $2,000,000
To calculate the percentage of completion for each year, we can use the formula:
Percentage of completion = (Total costs incurred to date) / (Estimated total costs)
Using this formula, we can calculate the percentage of completion for each year:
Percentage of completion in 2020 = ($900,000) / ($2,000,000) = 45%
Percentage of completion in 2021 = (($900,000) + ($1,200,000)) / ($2,000,000) = 105%
Since the percentage of completion in 2021 is greater than 100%, we need to adjust the revenue recognized in 2020 to reflect the overstatement. One way to do this is to recalculate the revenue recognized in 2020 using the percentage of completion for 2021 and subtracting the revenue recognized in 2020.
Revenue recognized in 2020 = (Percentage of completion in 2020) x (Total contract price) = (0.45) x ($2,159,000) = $971,550
Revenue recognized in 2021 = (Percentage of completion in 2021 - Percentage of completion in 2020) x (Total contract price) = (1.05 - 0.45) x ($2,159,000) = $1,295,400
Therefore, the portion of the total contract price recognized as revenue in 2020 is $971,550, and the portion recognized in 2021 is $1,295,400.