Contract Revenue and Cost Recognition Cost basis

Contract Revenue and Cost Recognition Cost basis

Under this method cost and revenue is recognized as percentage of stage of completion. In this method cost and profit is recognized as percentage of completion and revenue is balancing figure. The cost that is to be recognized at the end of year is calculate by the following

Total estimated Cost x % of completion

Example # 1

Contract Price	6 million
Cost incurred to date	1.5 million
Further cost	3.5 million
Calculate amount to be recognized in financial statements

Solution

This example solved involved two step i.e. in first step the stage of completion is calculated and in second step cost and profit is recognized using the stage of completion. Profit is recognized at the end as balancing figure by adding (Cost recognized+ Profit Recognized)

1. Stage of Completion

Cost incurred	1.5
Further cost	2.5
Total Cost	5 million
Stage of completion (1.5 million/5 million)	30%

2. Cost and Revenue Recognition

Revenue	1.8 (Balancing)
Cost Recognized (5 million x 30%)	1.5
Profit (1 million x 30%)	.3