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Percentage of completion method of revenue recognition

Problem:
Since they no longer play hockey, the Flyers are converting their practice facility into a large senior citizen's complex for a contract price of $5,000,000. This is a three-year project estimated to cost $4,000,000 and the following information is available:

(in$ thousands) year1 year2 year3
Cost incurred $1,000 1,500 1,250
estimated completion costs $3,000 1,500 0
Billing $ 750 1,750 2,500
Cash Collected $ 500 1,500 3,000

1. Refer to the above information. Using the percentage-of-completion method of revenue recognition, how much income is recognized in Year 2?

a. $ 250,000
b. $ 375,000
c. $ 625,000
d. $ 3,125,000

2. Refer to the above information. Using the percentage-of-completion method of revenue recognition, how much income is recognized in Year 3?

a. $ 375,000
b. $ 625,000
c. $ 1,000,000
d. $ 1,250,000

Solution Preview

Year 1: $1M of cost is incurred, which is 25% of the total cost. So the revenue recognized in year 1 should be 25% of $5 M which is $1.25 M

Year 2: Estimated ...

Solution Summary

The solution answers the question below in great detail.

$2.19