In 2021, Estelle's Star Makers agreed to build a movie theater for $100,000. Expected costs for the theater follow: 2022, $10,000; 2023, $20,000; and 2024, $50,000. Assume that Estelle completed the theater on time and on budget, that Estelle's performance obligation for the theater is fulfilled over time, and that the costs incurred provide a close approximation of the value conveyed to the customer.Answer the following question(s) by filling in the blanks. Do not include any symbols besides decimals in your answers (do not input commas).Compute revenues and expenses for each year 2022 through 2024.

Year
2022
2023
2024

Revenue
[R2022]
[R2023]
[R2024]

Expense
[E2022]
[E2023]
[E2024]

[R2022] =

Question

In 2021, Estelle's Star Makers agreed to build a movie theater for $100,000. Expected costs for the theater follow: 2022, $10,000; 2023, $20,000; and 2024, $50,000. Assume that Estelle completed the theater on time and on budget, that Estelle's performance obligation for the theater is fulfilled over time, and that the costs incurred provide a close approximation of the value conveyed to the customer.Answer the following question(s) by filling in the blanks. Do not include any symbols besides decimals in your answers (do not input commas).Compute revenues and expenses for each year 2022 through 2024.

Year
2022
2023
2024

Revenue
[R2022]
[R2023]
[R2024]

Expense
[E2022]
[E2023]
[E2024]

[R2022] =

BlackTom AI · Accepted Answer

Begin by identifying the key contract terms and the method of revenue recognition being used. The contract price is 100,000 and the estimated total costs to complete are 10,000 in 2022, 20,000 in 2023, and 50,000 in 2024, which sum to a total expected cost of 80,000. Since Estelle’s performance obligation is fulfilled over time and costs incurred provide a close approximation of value conveyed, the appropriate method is cost-to-cost percentage-of-completion.

Next, compute the percentage of total costs incurred each year and apply that to the total contract price to determine revenue recognized each year. For 2022, costs incurred are 10,000 out of 80,000 total, which is 10,000/80,000 = 12.5%. Multiply by the contract price: 0.125 × 100,000 = 12,500. This is the revenue to recognize in 2022.

For 2023, costs incurred are 20,000 out of 80,000 total, which is 20,000/80,000 = 25%. Revenue recognized in 2023 is 0.25 × 100,000 = 25,000.

For 2024, costs incurred are 50,000 out of 80,000 total, which is 50,000/80,000 = 62.5%. Revenue recognized in 2024 is 0.625 × 100,000 = 62,500.

Now consider the expenses. Under the cost-to-cost approach, expenses align with costs incurred to date, so the expense recognized in each year equals the actual costs incurred in that year: 10,000 in 2022, 20,000 in 2023, and 50,000 in 2024.

To summarize the year-by-year amounts:
- 2022: Revenue 12,500; Expense 10,000.
- 2023: Revenue 25,000; Expense 20,000.
- 2024: Revenue 62,500; Expense 50,000.

If you compare cumulative figures, by end of 2024 the cumulative revenue would equal 100,000, matching the contract price, and the cumulative expenses would equal 80,000, which matches the total estimated costs, aligning with the expected performance and cost-to-cost methodology.

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