Question

In spring 2014, Parmac Engineering Company signed a $160 million contract with the city of Parkersburg, to construct a new city hall. Parmac expects to construct the building within two years and incur expenses of $120 million. The city of Parkersburg paid $40 million when the contract was signed, $80 million within the next six months, and the final $40 million exactly one year from the signing of the contract. Parmac incurred $48 million in costs during 2014 and rest in 2015 to complete the contract on time. (Numerical calculations required)
Using the percentage-of-completion method how much revenue should Parmac recognize in 2014? Select one:

a. $40 million
b. $120 million
c. $64 million
d. $80 million
e. None of the above

Answer 1

Answer:

c. $64 million

Explanation:

For computing the revenue recognized, first we have to determine the percentage which is shown below:

= Cost incurred in 2014 ÷ expenses incurred

= $48 million ÷ $120 million

= 40%

And, the contract price is $160 million

So, the revenue recognized would be

= Contract price × percentage

= $160 million × 40%

= $64 million