Computing Revenue and Gross Profit on Long-term Construction Contract

Supplier Corp. enters into a government contract in 2020 to provide computer equipment for $2 million. The contract consists of a single performance obligation to provide specified equipment in three years. Total costs estimated by Supplier Corp. for the contract are $1.4 million. The equipment is highly specialized and has no alternative uses. As negotiated in the contract, any costs incurred by Supplier Corp. plus a specified profit margin will be paid to Supplier Corp. in the event of a contract cancellation. Actual costs incurred in 2020 were $650,000 including unexpected cost overruns of $80,000 due to labor inefficiencies.

a. Would revenue be recognized over time or at a point in time for this contract?

AnswerRecognize revenue over timeRecognize revenue at a point in time

b. Calculate (1) recognized revenue, (2) the gross profit, and (3) adjusted contract margin to be recorded in 2020.

Note: Round each of your answers to the nearest dollar.

1. Recognized revenue	Answer
2. Gross profit	Answer
3. Adjusted contract margin	Answer

parts a and b