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ACCA Strategic Professional · Strategic Business Reporting (International) · Revenue

Kestrel Co has a fixed-price contract of $800,000 to construct a facility, satisfied over time. Total expected costs are $600,000 and, at the year end, costs incurred are $240,000. Kestrel measures progress using the cost-to-cost input method, and all costs incurred reflect progress. What revenue and profit are recognised for the year?

Revenue is $320,000 and profit is $80,000. Progress is 40 per cent (240,000 divided by 600,000), applied to the $800,000 price. Deducting costs of $240,000 gives profit of $80,000, which is 40 per cent of total expected profit of $200,000.

  1. ARevenue $320,000; profit $80,000Correct
  2. BRevenue $240,000; profit nil
  3. CRevenue $320,000; profit $200,000
  4. DRevenue $800,000; profit $200,000

Explanation

Progress is 240,000/600,000 = 40%. Revenue is 40% x 800,000 = $320,000. Costs recognised are $240,000, so profit is $80,000 (equivalently 40% of total expected profit $200,000). Recognising revenue equal to costs gives no profit, which ignores the measure of progress.

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