Question

ABC Construction Inc. entered into a contract with a customer to build a movable storage facility on January 1, 2020, for $1,200,000. ABC Construction Inc. owns the work in process and constructs this type of storage unit for a number of customers. The customer made a down payment of 10% of the project, with an additional 10% due at the end of year one and the remaining due when it takes control of the facility. The facility is expected to be completed in two years for a total cost of $960,000. Actual costs incurred through December 31, 2020, are $400,000. Determine the amount of revenue to record in 2020.

There are three criteria to help us judge whether revenue should be recognized over time or not. I think this revenue may be recognized in time.

please tell me the revenue should be recorded at a point in time or over time. Thanks.

Answer 1

In Case of Construction Contracts the revenue is booked over time of construction since the work is not completed and the possession is not transferred to the owner which is utmost important, not immediately in time. The money received as down payment and 10% at year end one is immaterial.

In this case, the Revenue should be booked as follows:-

Year end December 31,2020 :- Cost incurred/total cost of project = $400,000/$960,000 = 41.66%

Total Revenue booked over the period of construction $1,200,000

Therefore revenue booked should be = $1,200,000*41.66% = $500,000..