Answer: 31.8

## Explanation This question involves revenue recognition for a long-term construction contract using the percentage-of-completion method. ### Key Information: 1. **Contract price**: €106 million 2. **Expected total costs**: €70 million 3. **Actual costs incurred in Year 1**: €21 million 4. **Bonus for on-time completion**: €8 million 5. **Costs incurred are an appropriate measure of progress** - indicates percentage-of-completion method 6. **Highly probable revenue will not be subsequently reversed** - meets IFRS 15 criteria for recognizing variable consideration ### Step-by-Step Calculation: **1. Determine total contract revenue:** Contract price + Bonus = €106 + €8 = €114 million **2. Calculate percentage of completion:** Percentage = Actual costs incurred / Expected total costs Percentage = €21 / €70 = 0.30 or 30% **3. Calculate revenue to recognize in Year 1:** Revenue = Total contract revenue × Percentage of completion Revenue = €114 × 0.30 = €34.2 million **4. Adjust for variable consideration constraint:** Since the bonus is variable consideration (contingent on on-time completion), we need to apply the constraint that revenue should only be recognized to the extent that it is highly probable that a significant reversal will not occur. **5. Apply the constraint:** The question states "if it is highly probable revenue will not be subsequently reversed," which means we can include the bonus in the calculation. **6. Final calculation:** Total revenue including bonus = €114 million Percentage complete = 30% Revenue recognized = €114 × 30% = €34.2 million Wait, let me reconsider. Looking at the options: - A. 31.8 - B. 33.8 - C. 34.2 My calculation gives €34.2, which is option C. However, I need to check if there's another consideration. **Important consideration:** The bonus might not be included in the total contract price until it's highly probable. Since the question states "if it is highly probable revenue will not be subsequently reversed," we should include the bonus. Let me recalculate without the bonus first: Without bonus: €106 × 30% = €31.8 million (Option A) With bonus: €114 × 30% = €34.2 million (Option C) Option B (33.8) doesn't seem to match any logical calculation. Given that the company is "very experienced with similar contracts" and it's "highly probable revenue will not be subsequently reversed," the bonus should be included. Therefore, the correct answer should be **C. 34.2**. **Final Answer: C. 34.2** Revenue recognized in Year 1 = (Contract price + Bonus) × (Actual costs incurred / Expected total costs) = (106 + 8) × (21 / 70) = 114 × 0.30 = €34.2 million

Author: LeetQuiz .