A contractor using the percentage-of-completion method has a $300,000 contract that is 60% complete. Total costs incurred to date are $150,000, with estimated total costs of $240,000. How much revenue should be recognized to date?
Correct Answer
C) $187,500
Under percentage-of-completion, revenue is recognized based on the percentage complete. 60% of $300,000 contract = $180,000. However, using cost-to-cost method: $150,000 ÷ $240,000 = 62.5% complete. Revenue = $300,000 × 62.5% = $187,500.
Why This Is the Correct Answer
The percentage-of-completion method requires calculating the actual percentage complete using the cost-to-cost method when costs are available. The actual completion percentage is $150,000 incurred costs ÷ $240,000 estimated total costs = 62.5%. Revenue recognition is then 62.5% × $300,000 contract value = $187,500. This method provides a more accurate reflection of project progress than the stated 60% estimate.
Why the Other Options Are Wrong
Option B: $200,000
$180,000 would be correct if using the stated 60% completion (60% × $300,000), but this ignores the more accurate cost-to-cost calculation which shows 62.5% completion based on actual costs incurred versus estimated total costs.
Option D: $180,000
$200,000 would represent about 67% completion, which exceeds both the stated 60% and the calculated 62.5% completion percentages based on the given cost data.
Memory Technique
Remember 'CCC' - Cost-to-Cost Calculation: Always divide costs incurred by estimated total costs to get the true completion percentage, then multiply by contract value for revenue recognition.
Reference Hint
Look up 'Percentage-of-Completion Method' and 'Cost-to-Cost Method' in accounting principles or construction accounting chapters of your reference materials.
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