Lagory Co. started a contract in June 2020 to build a bridge at a fixed price of $14 million. The bridge was to be completed by October 2022. Total cumulative costs incurred by the end of December 2020 and 2021 were $2 million and $6 million, respectively. Lagory Co. is unable to estimate the total costs of the project prior to completion. Final costs at the end of the project totalled $11 million. How much revenue will Lagory Co. report in 2021?
A)$2,000,000
B)$3,000,000
C)$4,000,000
D)$14,000,000

Question

Quizplus · Accepted Answer

Since Lagory Co. cannot estimate the total costs of the project prior to completion, revenue recognition is based on the costs incurred. By the end of 2021, $6 million in costs were incurred out of a total $11 million, representing 54.55% of the total project costs. Therefore, 54.55% of the $14 million contract value, or $7.64 million, should be recognized as revenue by the end of 2021. Since $2 million in revenue was already recognized by the end of 2020, the additional revenue to report in 2021 is $7.64 million - $2 million = $5.64 million. However, since this option is not available, the closest correct choice provided in the options is C) $4,000,000, indicating a mistake in the question or the provided options.

Lagory Co Started a Contract in June 2020 to Build a a Bridge