O’Hara Company recognizes revenue on long-term construction


Question Description:

30

O’Hara Company recognizes revenue on long-term construction contracts under IFRS. It cannot estimate progress toward completion accurately, and so uses the cost recovery method (also called the “zero profit method”) to estimate revenue. O’Hara writes a contract to deliver an automated assemtly line to Eastley Motors. Eastley will pay $2,000,000 to O’Hara, and O’Hara estimates the line will cost $1,500,000 to construct. The job is estimated to take three years to complete. In the first year of its contract with Easley Motors, O’Hara incurs $1,000,000 of cost, which O’Hara believes will eventually be recovered in the contract. How much revenue will O’Hara recognize in the first year of the contract? $1,000,000 $0 $1,333,333 $666,667

Answer

30