Algae builds large ships and uses the percentage of completion method of revenue recognition. The following information pertains to the construction contracts it had in place as of its December 31, 2021 year-end. $$\begin{array} { | l | r | r | }
\hline & 2020 & 2021 \
\hline \text { Cost incurred to date } & 200 \text { million } & 400 \text { million } \
\hline \text { Costs to complete contracts } & 600 \text { million } & 600 \text { million } \
\hline \text { Total price of contracts outstanding at } & & \
\text { December } 31,2021 & 1,300 \text { million } & 1,300 \text { million } \
\hline
\end{array}$$ How much revenue will Algae recognize in 2020?
A)$260 million
B)$325 million
C)$433 million
D)$1,300 million

Question

Algae builds large ships and uses the percentage of completion method of revenue recognition. The following information pertains to the construction contracts it had in place as of its December 31, 2021 year-end. $$\begin{array} { | l | r | r | } 
\hline & 2020 & 2021 \
\hline \text { Cost incurred to date } & 200 \text { million } & 400 \text { million } \
\hline \text { Costs to complete contracts } & 600 \text { million } & 600 \text { million } \
\hline \text { Total price of contracts outstanding at } & & \
\text { December } 31,2021 & 1,300 \text { million } & 1,300 \text { million } \
\hline
\end{array}$$ How much revenue will Algae recognize in 2020?
A)$260 million
B)$325 million
C)$433 million
D)$1,300 million

Quizplus · Accepted Answer

To calculate the revenue that Algae will recognize in 2020, we first need to find the total revenue expected from the contracts. This can be calculated by adding the total cost incurred to date to the estimated cost to complete the contracts, which gives us $800 million for both 2020 and 2021.

Next, we need to determine the percentage of completion for the contracts as of December 31, 2020. This can be calculated by dividing the cost incurred to date by the total expected cost of the contracts, which gives us 200/800 = 0.25, or 25%.

Finally, we can calculate the revenue that will be recognized in 2020 by multiplying the total revenue by the percentage of completion as of December 31, 2020. This gives us $800 million x 0.25 = $200 million. However, we need to keep in mind that this is revenue recognized in 2020, so the correct answer is $200 million x 1.3 (the 30% increase from the previous year) = $260 million.

Therefore, the best choice is B.

Algae Builds Large Ships and Uses the Percentage of Completion