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Give examples for the percentage of completion method
Let us consider two examples for the percentage of completion method.
Example 1
Calculate by using percentage of completion method, if estimated cost of project is $700000 and costs to date are $85000, total revenue estimated = $2000000).
Solution
The solution is as follows −
- Step 1
Percentage of completion = costs to date / estimated cost of project
= 85000/700000 ⇒ 12.14 % (rounded to two digits)
- Step 2
Revenue recognition = percentage of completion * total revenue estimated
= 12.14% * 2000000 ⇒ $ 242800
- Step 3
Income recognition = recognized revenue – costs to date
= 242800 – 85000 ⇒ $157800
Example 2
A construction is building a maintenance facility and the estimated cost for the project was $3000000 and he billed the customer for $3250000. Estimated gross margin of 20%
Solution
The solution is as follows −
Total expenses = estimated cost / (1- gross margin)
= 3000000 / (1 – 20%) ⇒ $3750000
Here, we can clearly see that the above amount is higher than the billed amount. So company gets additional revenue of $500000
The journal entry for the above data is as follows −
Particulars | Debit | Credit |
---|---|---|
Unbilled contract receivables | 500000 | |
Contract revenue earned | 500000 |
Revenue recognized (offset) = additional contract revenue * (1-gross margin)