Cost
and Revenue recognition on Sales Basis
Under
this method revenues and profit is recognized on the bases of work certified as
proportion to the contract price and cost is recognized as balancing figure. It
important to remember that cost and revenue is recognized on the bases of stage
of completion only in case of profit making contract, in case of loss making
contract loss is recognized in full.
Contract
Price
|
$ 400 Million
|
Work
completed
|
$ 200 million
|
Work
Certified
|
$ 150 million
|
Cost
incurred
|
$ 100 million
|
Further
Cost
|
$200 million
|
Calculate
the profit and revenue is to be recognized on sales bases
|
?
|
Solution
The example will be solved in three steps
1. Calculation
of Stage of Completion
2. Revenue
recognition on the bases of stage of completion
3. Cost
recognition as balancing figure
1.
Calculation of Stage of Completion
Work
Certified
|
$
150 million
|
Contract
Price
|
$
400 Million
|
Stage of completion ( 150 million /
400 million)
|
37.5 %
|
|
|
2.
Revenue and profit Recognition
Revenue
Recognition (400 x 37.5%)
|
$ 150
|
Profit
Recognition (400-300) x 37.5%
|
$ 37.5
|
Cost Recognized (Balancing)
|
$ 112.5
|
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