Construction Co lays railroad track and enters into a contract with Railroad to replace a stretch of track for a fixed fee of €100,000. All work in process is the property of Railroad. Construction Co has replaced 75 units of track out of 100 total units of track to be replaced by year end. The effort required of Construction Co is consistent across each of the 100 units of track to be replaced.
Construction Co determines that the performance obligation is satisfied over time, as Railroad controls the work in process asset being created.
Construction Co should recognise revenue totalling:
A) €100,000.
B) €75,000
C) €25,000
D) €175,000

Question

Quizplus · Accepted Answer

According to the performance obligation, revenue should be recognized over time as Railroad controls the work in process asset being created. Since Construction Co has replaced 75 out of 100 units of track, they have completed 75% of the work, and therefore they should recognize 75% of the revenue, which would be €75,000 (75% of €100,000 fee).

Construction Co Lays Railroad Track and Enters into a Contract