Question

1-

Al –Tawaan Plastics entered into a contract to install a pipeline for a fixed price of OR2,200,000. Al –Tawaan uses the cost recovery method of revenue recognition.

2015 2016                2017

Cost incurred 250,000                       1,600,000        450,000

Estimated cost to complete      1,550,000 500,000 0

In 2015, Al –Tawaan would report (rounded to the nearest thousand) gross profit (loss) of:

Select one:

a. OR 73,000

b.  OR 0

c.  OR 56,000

d.  OR (100,000)

2-

Al –Tawaan Plastics entered into a contract to install a pipeline for a fixed price of OR2,200,000. Al –Tawaan uses the cost recovery method of revenue recognition.

2015 2016                2017

Cost incurred 250,000                       1,600,000        450,000

Estimated cost to complete 1,550,000 500,000 0

In 2016, Al –Tawaan would report (rounded to the nearest thousand) gross profit (loss) of:

Select one:

a. OR(223,000)

b.  OR(206,000)

c. OR(150,000)

d. OR0.

3-

Al –Tawaan Plastics entered into a contract to install a pipeline for a fixed price of OR2,200,000. Al –Tawaan uses the cost recovery method of revenue recognition.

2015                2016                2017

Cost incurred 250,000 1,600,000        450,000

Estimated cost to complete 1,550,000 500,000 0

In 2017, Al –Tawaan would report (rounded to the nearest thousand) gross profit (loss) of:

Select one:

a. OR 50,000

b.  OR 2,000

c. OR(100,000)

d. OR 123,000

Answer 1

Under Cost Recovery method of revenue recognition , until coreesponding costs are fully recovered gross profit recognition will be deferred in case of a long term contract also. If loss , it should be recognized in that year.

In this question the collection amount is not given. Therefore answer is Gross profit should be recognized

1. 0 for year 2015

2. (150000) for Year 2016

3. 50000 for Year 2017

Calculation as follows:

Cost Recovery Method: Cost Incurred (Cumulative) Estimated cost to complete Total Cost to Complete Contract Fixed Price Gross Profit Collection Gross Profit to be recognized in 250000 1850000 2300000 1550000 500000 0 1800000 2350000 2300000 2200000 2200000 2200000 400000 - 150000 -100000 0 0 0 0 - 150000 50000

for your information and further understanding while in % of Completion method the answer would have been

% Of completion Method A B Cost Incurred (Cumulative) Estimated cost to complete Total Cost to Complete % of Completion Contract Fixed Price Gross Profit Gross Profit to be recognized in (Gross profit * % of Completion in case of Profit, if a loss then recognize fully) 2015 2016 2017 250000 1850000 2300000 1550000 500000 0 1800000 2350000 2300000 0.138889 0.787234 2200000 2200000 2200000 400000 - 150000 - 100000 55555.56 - 150000 -100000