A company fulfills one large contract at a time, and fulfillment on a contract t

Question

A company fulfills one large contract at a time, and fulfillment on a contract takes 15 months. The company completed a contract on December 1, 20Y1, accepted a new contract on February 1, 20Y2, and immediately began work to complete the new contract. The company uses the completed contract method of accounting for revenue rather than the percentage of completion method. Which of the following is the most likely effect on the company's income statements for the years 20Y2 and the succeeding year, 20Y3? on the 20Y3 income statement. in 20Y3. progress made on the contract during 2012. revenue will produce similar revenue levels on the income statements for each period. The revenue recognized on the 20Y2 income statement will be lower than the revenue recognized The revenue recognized on the 20Y2 income statement will be higher than the revenue recognized The revenue recognized on the 20Y2 income statement will be consistent with the amount of There will be no significant difference between the two years; the two methods of recognizing

Explanation / Answer

The answer is Option 1.

The contract is started in February 1, 20X2 and it takes 15 months to complete a project at a time. Hence, project would completed on April 30,20X3.

Because the company follows completed contract method of accounting to recognize revenue, the entire revenue for this contract would be recognized in 20X3 as the contract would be completed in 20X3 and there will be no recognition of revenue from this project in 20X2.

Hence, revenue recognized on the 20X2 Income statement will be lower than the revenue recognized on the 20X3 income statement. Option 1 is correct.

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