Give examples for the percentage of completion method

Let us consider two examples for the percentage of completion method.

Example 1

Calculate by using percentage of completion method, if estimated cost of project is $700000 and costs to date are $85000, total revenue estimated = $2000000).

Solution

The solution is as follows −

• Step 1

Percentage of completion = costs to date / estimated cost of project 

= 85000/700000 ⇒ 12.14 % (rounded to two digits)

• Step 2

Revenue recognition = percentage of completion * total revenue estimated 

= 12.14% * 2000000 ⇒ $ 242800

• Step 3

Income recognition = recognized revenue – costs to date 

= 242800 – 85000 ⇒ $157800

Example 2

A construction is building a maintenance facility and the estimated cost for the project was $3000000 and he billed the customer for $3250000. Estimated gross margin of 20%

Solution

The solution is as follows −

Total expenses = estimated cost / (1- gross margin) 

= 3000000 / (1 – 20%) ⇒ $3750000

Here, we can clearly see that the above amount is higher than the billed amount. So company gets additional revenue of $500000

The journal entry for the above data is as follows −

Revenue recognized (offset) = additional contract revenue * (1-gross margin)