Thursday, 8 January 2015

Cost and Revenue recognition on Sales Basis

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


No comments:

Post a Comment

Note: only a member of this blog may post a comment.