A project has incurred costs of $75,000 and is 40% complete based on cost-to-cost method. If the total contract value is $200,000, what amount should be recognized as earned revenue?
Correct Answer
A) $80,000
Using percentage of completion method: Earned revenue = Contract value × Percentage complete = $200,000 × 40% = $80,000. This matches the progress of work completed.
Why This Is the Correct Answer
The percentage of completion method calculates earned revenue by multiplying the total contract value by the percentage of work completed. Since the project is 40% complete and the contract value is $200,000, the earned revenue is $200,000 × 40% = $80,000. This method ensures revenue recognition matches the actual progress of work performed, which is a fundamental principle in construction accounting.
Why the Other Options Are Wrong
Option B: $125,000
This appears to be an incorrect calculation, possibly mixing up the remaining contract value or applying the percentage incorrectly. The calculation should be straightforward: total contract value times percentage complete.
Option D: $75,000
This amount ($125,000) doesn't correspond to any logical calculation using the given data. It's not 40% of the contract value, nor does it relate to the costs incurred in any standard accounting method.
Memory Technique
Remember 'Contract × Complete = Cash earned' - always use the total contract value times the completion percentage for earned revenue calculations.
Reference Hint
Look up 'Percentage of Completion Method' or 'Revenue Recognition' in construction accounting sections, typically found in business law or accounting chapters of contractor reference materials.
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