FAR 2 - Long-Term Construction Contracts Flashcards
When does completed contract method recognize income?
Completed contract method recognizes income only on completion (or substantial completion) of the contract
Difference between progress billings and construction in progress for completed contract method?
CURRENT ASSET
Construction in progress are costs of uncompleted contracts in excess of progress billings (Like Inventory)
CURRENT LIABILITY
Progress Billings is greater than cost. (Excess Billings)
When are losses recognized for completed contract method?
Losses are recognized in full in the year they are discovered
Advantages and disadvantages of completed contract method?
Advantage - based on final results instead of estimates
Disadvantage - it doesn’t reflect the matching principle when the period of the contract extends over more than one accounting period
Is completed contract method permitted in IFRS?
No completed contract method is not permitted in IFRS. You use percentage of completion method, if you can not reliably estimate use cost recovery method.
What is the most conservative method of accounting?
Cost recovery method because revenue can only be recognized to the extent that cash collected exceeds costs incurred
How to compute gross profit in percentage of completion method?
CONTRACT PRICE
- ESTIMATED TOTAL COST
= GROSS PROFIT
How to compute “% of completion” or job earned?
TOTAL COST TO DATE / TOTAL ESTIMATED COST OF CONTRACT
How to compute gross profit earned to date?
GROSS PROFIT X “%” OF COMPLETION
CONTRACT PRICE
- ESTIMATED TOTAL COST
= GROSS PROFIT
TOTAL COST TO DATE / TOTAL ESTIMATED COST OF CONTRACT = “%” OF COMPLETION
How to compute gross profit earned for current year?
GROSS PROFIT EARNED TO DATE
- PROFIT AT BEGINNING OF PERIOD
How are losses accounted for in percentage of completion method?
Entire loss should be recognized when current estimates of the total contract costs indicate a loss
Difference between progress billings and construction in progress for percentage of completion method?
CURRENT ASSETS
Costs AND estimated earnings of a uncompleted contracts in excess of progress billings - Called construction in progress
CURRENT LIABILITIES
Progress billings that exceed cost AND estimated earnings
What are advantages and disadvantages of percentage of completion method?
Advantage of percentage of completion method - more accurate method of accounting
Disadvantage - you are using estimates
How are changes in method of accounting for long-term construction contracts treated?
Retrospectively - Change in accounting principle.
Journal Entries to record Percentage of Completion Method?
1) Record cost incurred
2) Record billings on contract
3) Record payments received
4) Record revenue/cost during construction period
1) Record cost incurred
Dr: Construction in progress
Cr: Cash
2) Record billings on contract
Dr: Contracts receivable
Cr: Progress Billings
3) Record payments received
Dr: Cash
Cr: Contracts receivable
4) Record revenue/cost during construction period
Dr: Construction Expense
Dr: Construction in progress (the gross profit of that year)
Cr: Revenue
