91Ó°ÊÓ

It is an accounting approach that allows companies to postpone revenue and expense reporting until the completion of a contract.

Value of project = $420,000

Cost incurred = $278,000

Amount collected = $175,000

$$\begin{gathered} \mathrm{Profit}/\mathrm{Loss}\mathrm{incurred}\mathrm{from}\mathrm{contract}=\mathrm{Value}\mathrm{of}\mathrm{project}-\mathrm{Cost}\mathrm{incurred}-\mathrm{Amount}\mathrm{collected} \\ =\$420,000-\$278,000-\$175,000 \\ =\left(\$33,000\right) \end{gathered}$$Loss of ($33,000) incurred from this contract.

$$\begin{gathered} \mathrm{Revenue}=\mathrm{Cost}\mathrm{incurred}-\mathrm{Loss}\mathrm{incurred}\mathrm{from}\mathrm{contract} \\ =\$278,000-\$33,000 \\ =\$245,000 \end{gathered}$$

$$\begin{gathered} \mathrm{Total}\mathrm{cost}=\mathrm{Cost}\mathrm{incurred}+\mathrm{Amount}\mathrm{collected} \\ =\$278,000+\$175,000 \\ =\$453,000 \end{gathered}$$

$$\begin{gathered} \mathrm{Percent}\mathrm{complete}=\frac{\mathrm{Cost}\mathrm{incurred}}{\mathrm{Total}\mathrm{Cost}}×100 \\ =\frac{\$278,000}{\$453,000}×100 \\ =61·36\% \end{gathered}$$

$$\begin{gathered} \mathrm{Recognizable}\mathrm{Revenue}=\mathrm{Value}\mathrm{of}\mathrm{contract}×\mathrm{Percent}\mathrm{complete} \\ =\$420,000×\frac{61·36}{100} \\ =\$257,712 \end{gathered}$$

$$\begin{gathered} \mathrm{Profit}/\mathrm{Loss}\mathrm{incurred}\mathrm{from}\mathrm{Contract}=\mathrm{Revenue}\mathrm{recognize}-\mathrm{Cost}\mathrm{incurred} \\ =\$257,712-\$278,000 \\ =\left(\$20,288\right) \end{gathered}$$

From this contract, a loss of ($20,288) is incurred..