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Question 1

The percentage-of-completion method of accounting for long-term construction-type contracts is preferable when

Answer 1

This answer is correct. Per ASC Topic 605, the percentage-of-completion method for long-term contracts is preferable over the completed-contract method when estimates of cost to complete and extent of progress made toward completion are reasonably dependable. Under the percentage-of-completion method, income would be periodically recognized as the contract is completed.

Question 2

When progress billings are sent on a long-term contract, what type of account should be credited under the completed-contract method and percentage-of-completion method?

Answer 2

This answer is correct. Under the percentage-of-completion method, income is recognized periodically on the basis of the percentage of the job that is complete. The completed-contract method recognizes income from the job only when the contract is completed. This is the only difference in accounting for the two methods. For both methods, when progress billings are sent, “Billings on construction in progress” is credited for the amount billed. This is shown on the balance sheet as a contra account to Construction in progress.