ABC expends $500,000 for work performed under a contract with a total contract price of $3 million and estimated costs of $2.5 million. It sends a bill to the customer for $400,000 under the terms of the contract.

a. How much revenue and gross profit should the company recognize in the income statement?
b. How is the $400,000 billing reported on the balance sheet?

a. $100,000

b. The $400,000 will be reported as accounts receivable in the balance sheet under current assets.

Explanation:

Under the cost to completion method, the amount of revenue earned from long term projects is a function of the cost incurred on the project. In other words, the more the cost incurred, the higher the revenue.

Given that the total contract price of $3 million and estimated costs of $2.5 million, when $500,000 is expended for work performed, actual revenue earned and to be recognized

= $500,000/$2.5 million *$3 million

= $600,000

Gross income = Revenue - cost of sales

= $600,000 - $500,000

= $100,000

If the company only bills $400,000 having earned $600,000

Debit Accounts receivables $400,000

Debit Unbilled receivables $200,000

Credit Revenue account  $600,000

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