Ronin Corp. recognizes revenue over time related to a long-term contract. The contract price is $5,000,000, total expected construction costs are $3,000,000, and actual costs incurred during the first year are $300,000. Actual costs for year 2 are $900,000 and estimated cost to complete is $1,800,000. The amount of previously recognized revenue is $500,000. Revenue recognized for year 2 is:

$1,500,000

Explanation:

Under the cost to completion method of revenue recognition, the revenue recognized in each year from the construction contract is a function of the cost incurred to date.

In the first year, revenue recognized

= $300,000/$3,000,000 * $5,000,000

= $500,000

Given that the actual cost for the second year is $900,000, the total cost incurred on the contract is

= $900,000 + $300,000

= $1,200,000

Cummulative revenue by the end of the 2nd year

= 1,200,000/3,000,000 * $5,000,000

= $2,000,000

Since $500,000 was recognized as revenue in the first year, the second year revenue

= $2,000,000 - $500,000

= $1,500,000