Revenue Recognition for Long-Term Contracts: Percentage-of-Completion Method
Stelle Technology has a contract to build a network for a customer for a total sales price of €10 million. The network will take an estimated three years to build, and total building costs are estimated to be €6 million. Stelle recognizes long-term contract revenue using the percentage-of-completion method and estimates percentage complete based on expenditure incurred as a percentage of total estimated expenditures.
1. At the end of Year 1, the company had spent €3 million. Total costs to complete are estimated to be another €3 million. How much revenue will Stelle recognize in Year 1?
2. At the end of Year 2, the company had spent an additional €2.4 million for an accumulated total of €5.4 million. Total costs to complete are estimated to be another €0.6 million. How much revenue will Stelle recognize in Year 2?
3. At the end of Year 3, the contract is complete. The company spent an accumulated total of €6 million. How much revenue will Stelle recognize in Year 3?