FAR 23 - Long Term Contracts

Question 1

What are the two methods to account for Long Term Contracts?

Answer 1

1. Percentage of Completion
2. Completed Contract Method

Question 2

Percentage of Completion Entries (4)

Answer 2

1. Billings

DR: Construction Receivable

CR: Billings

2. Collections

DR: Cash

CR: Construction Receivable

3. Costs

DR: CIP

CR: Cash

4. Recognize Profit

DR: CIP

CR: Gross Profit on CIP (I/S)

Question 3

Percentage of Completion %

(Cost-to-Cost Method)

Answer 3

Formula = Cost Incurred / Actual + Estimated to Complete

+Total Profit

xPercentage of completion (%)

= Profit Recognized to Date

-Profit Previously Recognized in previous years

=Profit to recognize THIS YEAR

Question 4

What to do with Anticipated Losses in Long Term Constuction Contracts?

Answer 4

Recognize Immediately

Question 5

Completed Contracts Method Entries (3)

Answer 5

1. Billings

DR: Construction Receivable

CR: Billings

2. Collections

DR: Cash

CR: Construction Receivable

3. Costs

DR: CIP

CR: Cash

**Profit is recognized when contract is completed**

Question 6

How do you calculate profit from long term contracts?

Answer 6

CIP - Expenses = Profit