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 percentage-of-completion 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

The percentage-of-completion method calculates income based on the percentage of the project completed each year. For Year 5, the total costs incurred by the end of Year 5 are $5,600,000 (Year 4) + $11,200,000 (Year 5) = $16,800,000. The total estimated costs are $22,400,000. Thus, the completion percentage by the end of Year 5 is $16,800,000 / $22,400,000 = 75%. The total revenue recognized by the end of Year 5 is 75% of the total contract price, which is 75% of $28,000,000 = $21,000,000. By the end of Year 4, 25% ($5,600,000 / $22,400,000) of the project was completed, and 25% of the total contract price was recognized, which is $7,000,000. Therefore, the income recognized in Year 5 is the difference between the total revenue recognized by the end of Year 5 and the total revenue recognized by the end of Year 4, which is $21,000,000 - $7,000,000 = $14,000,000. However, the costs incurred in Year 5 are $11,200,000. Thus, the income from the contract for Year 5 is $14,000,000 - $11,200,000 = $2,800,000.

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 $\begin{array}{ll}\text { Year 4 } & \$ 5,600,000 \\\text { Year } 5 & \$ 11,200,000 \\\text { Year 6 } & \$ 5,600,000\end{array}$