Contract Accounting

Question 1

What two methods of Revenue Recognition are used in Long Term Contracts?

Answer 1

1. ) Completed Contract Method - no profit recognized until the contract is complete
2. ) Percentage of completion - Recognize profit in degree of completion

Question 2

What method is used under international standards if the percentage of completion method is not appropriate?

Answer 2

Cost recovery (zero profit) method.

Question 3

What is the amount of loss recognized in a period under the percentage of completion method when estimated total project cost exceeds contract price and gross profit was recognized in previous years?

Answer 3

Total project cost less contract price, plus gross profit recognized in previous years

Question 4

Describe the nature of the construction in progress account.

Answer 4

Inventory account - a current asset

Question 5

What is the percentage of completion of a project when an overall loss on the contract is expected?

Answer 5

Same as usual; total cost to date divided by total estimated project cost

Question 6

What is the contra account to construction in progress?

Answer 6

The contra account is Billings on contracts

Question 7

When is the balance in construction in progress the same for the percentage of completion method and completed contract method?

Answer 7

When an overall loss is expected on the contract

Question 8

What is the accounting effect when a single period loss occurs on a contract expected to be profitable?

Answer 8

Total gross profit through the period is less than the gross profit recognized in earlier periods

Question 9

Describe revenue recognition for the percentage of completion method

Answer 9

Recognize profit in proportion to degree of completion. Required if estimates of degree of completion at interim points can be made and reasonable estimates of total project cost can be made.

Question 10

What is the amount of loss recognized in a period under the completed contract method when estimated total project cost exceeds contract price?

Answer 10

Overall loss; total project cost less contract price

Question 11

Describe the revenue recognized under the percentage of completion for the second year of a contract

Answer 11

Total revenue through year two based on the percentage of completion through year two, less revenue recognized for year one

Question 12

Why are billings on construction treated as a contra to construction in progress?

Answer 12

To avoid double counting of assets

Question 13

What type of account is CIP?

Answer 13

An inventory account and a current asset