In 2019, Cashmere Construction Company, a small business, enters into a contract to build a beach cottage for Martha and Rob for a total price of $500,000.Cashmere estimates the total cost to complete the cottage to be $400,000.In
2019, Cashmere incurred $300,000 of costs on the contract, and in 2020 the contract was completed at a total cost of
$425,000.Cashmere is not required to recognize any income from the contract until 2020.

Question

Quizplus · Accepted Answer

Cashmere Construction Company follows the percentage-of-completion method for recognizing revenue from long-term contracts. According to this method, revenue and expenses are recognized in proportion to the percentage of work completed on the contract. In this case, the contract was completed in 2020 and the total cost incurred was $425,000. Therefore, no income can be recognized until 2020 when the contract is completed. Hence, the statement is true.

In 2019, Cashmere Construction Company, a Small Business, Enters into a Contract