Reference no: EM132787197
On September 1, 20x1, ABC Co. enters into a contract with a customer to remodel a plant's electrical wirings and install a new generator for a total consideration of ?12M. The remodeling and the installation are treated as a single performance obligation satisfied over time.
The expected contract costs are as follows:
Generator 4,000,000
Other costs 5,000,000
Expected total contract costs 9,000,000
Additional information:
- ABC Co. uses the cost-to-cost method in measuring its progress towards the complete satisfaction of the performance obligation.
- ABC Co. incurs total costs of ?6,000,000 in 20x1, including the cost of the generator.
- The customer obtains control of the generator when it is delivered to the site in December 20x1. However, the generator will not be installed until March 20x2.
- ABC Co. regards the cost of the generator as significant in relation to the expected total contract costs.
- Although ABC Co. acted as a principal in procuring the generator, ABC Co. is not involved in designing or manufacturing the generator.
Problem 1: How much profit is recognized from the contract in 20x1?
a. 5,600,000
b. 2,400,000
c. 1,800,000
d. 1,200,000