F2 - Long-term construction contracts

Question 1

Under the completed contract method, revenue is recognized when _____________________. However, expected losses are recognized _______________.

Answer 1

The contract is complete.

Immediately in their entirety.

Question 2

Percentage of completion formula:

Answer 2

Step 1: Compute gross profit of completed contract.
Contract Price - estimated total cost = Gross Profit
Step 2: Compute “% of completion”:
Total Cost to date / Total estimated cost of contract
Step 3: Compute gross profit earned (profit to date)
Step 1 X Step 2 = Profit to Date
Step 4: Compute gross profit earned for current year
Profit to Date at current FYE - Profit to Date at beginning of period = Current year-to-date Gross Profit

Question 3

Under percentage of completion method, an estimated loss on the total contract is recognized:

Answer 3

Immediately in the year it is discovered. Any previous gross profit or loss reported in prior years must be adjusted for when calculating the total estimated loss.

Question 4

When a company uses the U.S. GAAP “completed contract” method to account for long-term construction contracts, Revenue is recognized when:

Answer 4

The job is completed, NOT when progress billings are collected or when they exceed recorded costs.

Question 5

Percentage of completion formula (simplified)

Answer 5

[(Total costs incurred/total expected costs) X (Total expected gross profit)] - total gross profit previously recognized.

Question 6

Under the percentage of completion method, if the sum of cumulative costs incurred plus cumulative gross profit recognized exceeds cumulative billings, the excess is reported as a _________________. If cumulative billings exceeds the sum of cumulative costs incurred plus cumulative gross profit recognized, the difference is reported as a _________________. If the two amounts are equal __________________.

Answer 6

Current Asset

Current Liability

No asset or liability is recognized.