Question

A On December 31, 2017, State Construction Inc. signs a contract with the state of West Virginia Department of Transportation to manufacture a bridge over the New River. State Construction anticipates the construction will take three years. The company’s accountants provide the following contract details relating to the project: Contract price $780 million Estimated construction costs $600 million Estimated total profit $180 million During the three-year construction period, State Construction incurred costs as follows: 2018 $ 60 million 2019 $360 million 2020 $180 million State Construction uses the cost-to-cost method to recognize revenue. Calculate the revenue recognized in 2018, 2019, and 2020.

Answer 1

Answer:

2018: $78 million

2019: $468 million

2020: $234 million

Explanation:

Given that State Construction incurred costs as follows:

Year                         Cost

2018                         $60 million

2019                         $360 million

2020                        $180 million

Total cost = $60 million + $360 million + $180 million = $600 million

Percentage to total cost ratio is:

For 2018 = $60 million / $600 million = 0.1,

For 2019 = $360 million / $600 million = 0.6,

For 2020 = $180 million / $600 million = 0.3.

Revenue = Percentage to total cost ratio × Contract price.

Contract price = $780 million

For 2018, Revenue = 0.1 × $780 million = $78 million

For 2019, Revenue = 0.6 × $780 million = $468 million

For 2020, Revenue = 0.3 × $780 million = $234 million