Lesson Objectives:- Example of the percentage of completion method
- How to calculate the percentage complete
- Calculating revenue and profit figures
We will go back to the same example from the previous lesson of a long-term contract for constructing a government laboratory building. Let's say the total contract price is $16,000,000 for a 3-year time period.
We will use the costs incurred figures above to calculate the percentage of completion for each year and ultimately determine how much revenue should be recognized.
As you can see from the table, the contract price is a set amount and the estimated costs left decrease over time based on the amount of costs incurred during that time period.
Next, lets use a standard template format to calculate the percentage of completion and how much revenue should be recognized each year. We will start by pre-filling the contract price, costs incurred in the period and estimated costs left. The costs to date are simply calculated by adding the costs from the previous period to the current period.
The next part of the cost section is to calculate the percentage complete which will ultimately help us to determine the revenue that should be recognized. We calculate this percentage by dividing the costs to date by the total estimated costs.
Now, in order to calculate the revenue to date, we simply multiply the percentage complete by the contract price. For example in 2013, $16,000,000 would be multiplied by 0.269 to come up with a revenue to date figure of $ 4,304,000. Since 2013 is the first year we are reporting, that figure will be carried down to the revenues this year field. For 2014 and 2015, we simply subtract the revenues from previous years from the revenue to date to come up with the revenues this year.
The final section we need to calculate is the gross profit fields. The gross profit to date is found by subtracting the costs to date from the revenue to date. For example in 2014, the costs to date of $3,700,000 are subtracted from the revenues to date of $6,368,000 to come up with the gross profit to date of $2,668,000.
To come up with the gross profit this year, the gross profit from previous years is subtracted from the gross profit to date. For example in 2015, the gross profit from previous years of $2,668,000 is subtracted from the gross profit to date of $6,700,000 to get a gross profit this year of $4,032,000.
This template may seem a little complex at first glance but the more you practice calculating the percentage complete and revenue figures, the easier it will be to understand how this method works.
Make sure you use this format to make the process as easy as possible by looking at the costs and percentage completed first, then calculating revenue and gross profit amounts.