Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000.Estimated costs for the contract are:
$\begin{array}{ll}
\text { Year 4 } & \$ 5,600,000 \
\text { Year } 5 & \$ 11,200,000 \
\text { Year 6 } & \$ 5,600,000
\end{array}$
$\text { Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows: }$
$\begin{array}{ll}
\text { Year } 4 & \$ 4,200,000 \
\text { Year } 5 & \$ 7,000,000 \
\text { Year 6 } & \$ 16,800,000
\end{array}$ Refer to the Rock Aerospace Company example.Income from the contract for Year 5 under the cost-recovery-first method is:
A)$1,000,000
B)$1,400,000
C)$2,800,000
D)$3,360,000
E)None of the above

Question

Quizplus · Accepted Answer

Under the cost-recovery-first method, revenue is recognized only to the extent of costs incurred until the total costs are recovered. By the end of Year 5, Rock Aerospace has incurred a total of $16,800,000 in costs ($5,600,000 in Year 4 and $11,200,000 in Year 5) and has collected $11,200,000 ($4,200,000 in Year 4 and $7,000,000 in Year 5). Since the collections are less than the costs incurred by the end of Year 5, no profit is recognized, and thus none of the provided options (A, B, C, D) accurately reflect income from the contract for Year 5 under the cost-recovery-first method.

Rock Aerospace Company Signed a Contract on April 1, Year Year 4 $5,600,000 Year 5$11,200,000 Year 6 $5,600,000\begin{array}{ll}\text { Year 4 } & \$ 5,600,000 \\\text { Year } 5 & \$ 11,200,000 \\\text { Year 6 } & \$ 5,600,000\end{array} Year 4 Year 5 Year 6 ​$5,600,000$11,200,000$5,600,000​

Rock Aerospace Company Signed a Contract on April 1, Year $\begin{array}{ll}\text { Year 4 } & \$ 5,600,000 \\\text { Year } 5 & \$ 11,200,000 \\\text { Year 6 } & \$ 5,600,000\end{array}$