Accounting for Construction Contracts Flashcards
Exam Questions:
- Gross profit or loss recognized
- Amount reported for contract asset or liability at the end of the year
- Balance in A/R
- How construction accounts are reported
When there is uncertainty in the earnings process, you use which method of accounting?
Contract accounting
What methods are used to account for contract accounting?
1) Percentage of completion method
2) Completion-of-production
When do you use percentage of completion method?
Used for long-term construction contracts
Required if project costs are estimable
Recognize profit as work proceeds
When do you use completion of production?
Lack of dependable estimates
What are the steps to percentage of completion?
1) Degree of completion (cost to date / estimated cost)
2) Profit to date: (Degree of completion X Expected total profit)
3) Profit recognized in the current year: (Profit to date-Previously Recognized Profit)
Do progress bills have an impact on recognition of the profit?
NO! It does not have any impact on profits!
When you invoice the customer, you do the following transaction?
AR DB
CIP CR
When you incur costs to complete the project, how do you record that transaction?
CIP DB
CASH, Payable CR
When revenues are recognized, how do you record that?
DB: CIP (Gross Profit)
DB: Construction Expense
CR: Construction revenue
Construction in Process can be an asset or liability? How?
If Cost + Profit > Billing –> Asset
If cost + Profit < Billing –> Liability
What are the two type of losses for construction?
A single period loss- The contract remains profitable, but total estimated profit decreases during a period. Recognize loss in period it occurs.
Overall loss: The contract is not profitable cost > Price. Recognize the entire loss in the period it occurs.
Completed contract Method:
CANNOT ESTIMATE COST.
No profits are recognized until work is substantially completed.
Recognize 100% of the anticipated loss immediately
