IT Technology enters into a contract with the federal government to create a system for the price of $19 million. IT receives $7.6 million when the contract is signed and the other $11.4 million upon completion of the project. The government maintains control of the system during the creation process. IT estimates that 36,000 labor hours will be required to complete the product. During the current year 10,800 labor hours are used and during the following year, the remaining 25,200 hours were used. What will be included in the journal entry at the end of the current year? (Round any intermediary calculations to the nearest cent, and round your final answer to the nearest dollar.)
A) Debit to Service Revenue for $5,700,024
B) Credit to Unearned Revenue for $11,400,000
C) Credit to Service Revenue for $13,299,976
D) Debit to Unearned revenue for $5,700,024

Question

Quizplus · Accepted Answer

The revenue recognized at the end of the current year is based on the percentage of completion method. 10,800 hours out of 36,000 total hours is 30% completion. Therefore, 30% of the total contract price of $19 million is $5,700,000. Since $7.6 million was received upfront, the debit to Unearned Revenue would be for the amount recognized as revenue, which is $5,700,024.

IT Technology Enters into a Contract with the Federal Government