In 20x1, ABC Co. was contracted to build a railroad. The contract price is equal to the construction costs incurred plus 20% thereof. However, if the project is completed within 4 years, ABC will receive an additional payment of P200,000. Information on the project is shown below: 20x1 20x2 Costs incurred to date Estimated costs to complete 2,400,000 3,600,000 4,575,000 1,525,000 20x3 6,125,000 125,000 In 20x1 and 20x2, it was not highly probable that the project will be completed on time. However, in 20x3, ABC assessed that the project will be completed earlier than originally expected and thus it is now highly probable that the incentive payment will be received.

In 20x1, ABC Co. was contracted to build a railroad. The contract price is equal to the construction costs incurred plus 20% thereof. However, if the project is completed within 4 years, ABC will receive an additional payment of P200,000. Information on the project is shown below: 20x1 20x2 Costs incurred to date Estimated costs to complete 2,400,000 3,600,000 4,575,000 1,525,000 20x3 6,125,000 125,000 In 20x1 and 20x2, it was not highly probable that the project will be completed on time. However, in 20x3, ABC assessed that the project will be completed earlier than originally expected and thus it is now highly probable that the incentive payment will be received.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Contract Costing

Contract costing is about tracing particular costs related to a particular contract entered into with the customer. It is one of the forms of job order costing. It is useful in long-term contracts at the most. It is seen that substantial time is required for the completion of the contract which takes different accounting periods. Thus, it is very much helpful for recognizing the costs associated with it and accounting in their specific accounting periods.

Question

Questions: 1. How much revenue is recognized in the contract in 20x3? 2. How much profit is recognized in the contract in 20x3?

In 20x1, ABC Co. was contracted to build a railroad. The contract price is equal to the construction
costs incurred plus 20% thereof. However, if the project is completed within 4 years, ABC will receive
an additional payment of P200,000. Information on the project is shown below:
20x1
20x2
Costs incurred to date
Estimated costs to complete
2,400,000
3,600,000
4,575,000
1,525,000
20x3
6,125,000
125,000
In 20x1 and 20x2, it was not highly probable that the project will be completed on time. However, in
20x3, ABC assessed that the project will be completed earlier than originally expected and thus it is
now highly probable that the incentive payment will be received.

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