In spring 2017, Parmac Engineering Company signed a $240 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 $180 million. The city of Parkersburg paid $60 million when the contract was signed, $120 million within the next six months, and the final $60 million exactly one year from the signing of the contract. Parmac incurred $72 million in costs during 2017 and rest in 2018 to complete the contract on time.
Using the cost-to-cost method how much revenue should Parmac recognize in 2017?
A) $ 60 million
B) $108 million
C) $ 96 million
D) $180 million
E) None of the above

Question

Quizplus · Accepted Answer

The cost-to-cost method recognizes revenue based on the percentage of costs incurred to date relative to the total estimated costs of the project. In this case, Parmac incurred $72 million in costs during 2017, which represents 40% of the total estimated costs of $180 million. Therefore, Parmac should recognize 40% of the total contract revenue of $240 million, which is $96 million.

In Spring 2017, Parmac Engineering Company Signed a $240 Million