CFA Level I · CFA Level I Exam · Analyzing Income Statements
A contractor builds a specialised facility for a customer under a contract where the customer controls the asset as it is built. Using the input method, the contractor has incurred $3.0 million of costs to date against total expected costs of $10.0 million. The contract price is $14.0 million. Revenue recognized to date is most likely:
Revenue to date is $4.2 million. Because control passes over time, revenue follows progress measured by costs incurred: 3.0 of 10.0 million is 30%, and 30% of the $14.0 million contract price equals $4.2 million.
- A$3.0 million
- B$4.2 millionCorrect
- C$14.0 million
Explanation
Progress is 3.0/10.0 = 30%. Revenue is 30% × $14.0 million = $4.2 million. Recognizing $3.0 million equates revenue with cost, giving no margin, which is wrong. Recognizing the full price ignores that the obligation is satisfied over time.
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