Lesson 4

Question 1

What is long-term construction contract accounting?

Answer 1

When revenue is recognized over time

Question 2

What are the three criteria that (at least one) must be met to recognize revenue over time?

Answer 2

1. The customer simultaneously receives and consumes the benefits for the seller’s performance as the seller performs
2. The company’s performance creates or enhances an asset (work in process) that the customer controls as the asset is created or enhanced.
3. The company’s performance does not create an asset with an alternative use. (The asset cannot be sed by another customer.)
   A. another company would not need to re-perform the work
   B. The company has a right to payment for its performance completed to date, and it expects to fulfill the contract as promised.

Question 3

What is the percentage-of-completion method?

Answer 3

The company recognizes revenue and gross profits each period based upon the progress of the construction.

Question 4

What happens if the company doesn’t meet the criteria for recognition over time? What is it called?

Answer 4

The company recognizes revenue and gross profits at the point in time when the contract is completed.
Completed-contract method

Question 5

What are the most common methods to determine the extent of progress toward completion. (percentage-of-completion)

Answer 5

1. Cost-to-cost (input measure)
2. Units-of-delivery

Question 6

What are input measures?

Answer 6

They are (costs incurred, labor hours worked) efforts devoted to a contract.

Question 7

What are output measures?

Answer 7

They (with units of delivery measured as tons produced, floors of a building completed, miles of a highway completed) tracked results.

Question 8

What is the cost-to-cost basis formula?

Answer 8

Cost incurred to date / Most recent estimate of total cost = percent complete

Percent completed X estimated total revenue (gross profit) = Revenue (or gross profit) to be recognized to date

Revenue to be recognized to date - revenue recognized in prior periods = current period revenue

Question 9

What are the 2 types of losses under long-term contracts?

Answer 9

1. Loss in the current period on a profitable contract
2. Loss on an unprofitable contract

Question 10

Which type of revenue or gain is generally recognized with the passage of time?

Answer 10

Gain or loss from disposition

Question 11

When should companies use the percentage-of-completion method to account for long-term construction contracts?

Answer 11

Always unless required to use the completed-contract method

Question 12

In selecting an accounting method for a newly contracted long term construction project, what principal factor should be considered?

Answer 12

The degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.

Question 13

How should the Billings on Construction in Process account is reported as?

Answer 13

As a revenue on the income statement.

Question 14

How is a loss in the current period on a contract expected to be profitable upon completion in a later year recognized?

Answer 14

Under the percentage of completion method

Question 15

Under the percentage of completion method, how should the balances of Billings on Construction in Process and Construction in Process be reported prior to the completion of a long term contract?

Answer 15

Net, as a current asset if a debit balance, and as a current liability if a credit balance