A job has a contract value of $500,000 and is 40% complete based on costs incurred. Total costs incurred to date are $180,000 with a total estimated cost of $420,000. Using the percentage-of-completion method, what revenue should be recognized?
Correct Answer
C) $214,286
Percentage complete = $180,000 ÷ $420,000 = 42.86%. Revenue recognized = $500,000 × 42.86% = $214,286.
Why This Is the Correct Answer
The percentage-of-completion method requires calculating the actual percentage complete based on costs incurred versus total estimated costs, not the stated 40%. The actual percentage is $180,000 ÷ $420,000 = 42.86%. This percentage is then applied to the total contract value of $500,000 to determine revenue recognition: $500,000 × 42.86% = $214,286.
Why the Other Options Are Wrong
Option A: $180,000
$200,000 would result from incorrectly using the stated 40% completion rate ($500,000 × 40% = $200,000) rather than calculating the actual percentage based on cost ratios.
Option B: $238,095
$180,000 represents the costs incurred to date, not the revenue to be recognized. Revenue recognition under percentage-of-completion method requires applying the completion percentage to the contract value, not simply recording costs as revenue.
Memory Technique
Remember 'CTC' - Costs incurred ÷ Total estimated Costs = percentage, then apply to Contract value. The percentage-of-completion method is about matching revenue to actual progress, not stated progress.
Reference Hint
Look up 'Percentage-of-Completion Method' or 'Revenue Recognition for Long-term Contracts' in the accounting or project management sections of your reference materials.
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?