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Solution

Note: For simplification purposes, the table calculates revenue for the year independently based on costs
incurred during the year divided by total expected costs, with the assumption that total expected costs do not
change.

Particulars Reference Year 1 Year 2 Year 3 Year 4 Year 5
Fixed A 22,00,000
Consideration
Estimated costs to B 20,00,000
complete*
Total estimated variable C 2,20,000 2,20,000 2,20,000 5,50,000 5,50,000
Consideration
Costs D 1,20,000 3,70,000 8,20,000 5,70,000 1,20,000
Fixed revenue E=A x D/B 1,32,000 4,07,000 9,02,000 6,27,000 1,32,000
Variable revenue F=C x D/B 13,200 40,700 90,200 1,56,750 33,000
Cumulative catch-up G (W.N. 1) - - - 2,16,150 -
Adjustment
Total revenue H=E+F+G 1,45,200 4,47,700 9,92,200 9,99,900 1,65,000
Operating profit I=G–H 25,200 77,700 1,72,200 4,29,900 45,000
Margin (rounded off) J=I/G 17.36% 17.36% 17.36% 43% 27.27%
* For simplicity, it is assumed there is no change to the estimated costs to complete throughout the contract

period.
* In practice, under the cost-to-cost measure of progress, total revenue for each period is determined by

multiplying the total transaction price (fixed and variable) by the ratio of cumulative cost incurred to total

estimated costs to complete, less revenue recognized to date.

W.N. 1

Calculation of cumulative catch-up adjustment:
Updated variable consideration L 5,50,000
Percent complete in Year 4: (rounded off) M=N/O 94%
Cumulative costs through Year 4 N 18,80,000
Estimated costs to complete O 20,00,000
Cumulative variable revenue through Year 4: P 3,00,850
Cumulative catch-up adjustment F=L x M–P 2,16,150

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