Long Term Construction contract

Question 1

Haft Construction Co. has consistently used the percentage-of-completion method. On January 10, Year 1, Haft began work on a $3,000,000 construction contract. At the inception date, the estimated cost of construction was $2,250,000. The following data relate to the progress of the contract:
Income recognized at 12/31/Year 1 $ 300,000
Costs incurred 1/10/ Year 1 through 12/31/Year 2 1,800,000
Estimated cost to complete at 12/31/Year 2 600,000
In its income statement for the year ended December 31, Year 2, what amount of gross profit should Haft report?
a.
$150,000
b.
$262,500
c.
$300,000
d.
$450,000

Answer 1

Contract price	$ 3,000,000
  Cost to date	1,800,000
  Estimated cost to complete	600,000
  Total cost	$  2,400,000
  Expected gross profit	600,000
 Percentage complete (18/24)	75%
  Profit to date	450,000
  Profit previously recognized	(300,000)
  Year 2 profit	$  150,000

Question 2

A company used the percentage-of-completion method of accounting for a 5-year construction contract. Which of the following items will the company use to calculate the income recognized in the third year?

Answer 2

When a company uses the “percentage-of-completion” method of accounting for a five-year construction contract, income previously recognized would be used to calculate the income recognized in the second year (but not progress billings to date).

exmaple
	Year 2
 Total contract sales price	$ 4,000
  Less total estimated cost of contract	3,200
  Total gross profit	800
 × % of completion	× 75%
 Gross profit earned to date (cumulative)	600
  Less income previously recognized	500
 Income recognized in current year	$ 100

Question 3

A company uses the completed-contract method to account for a long-term construction contract under U.S. GAAP. Revenue is recognized when recorded progress billings:

• Are collected
• exceeds recorded cost

Answer 3

When a company uses the U.S. GAAP “completed contract” method to account for a long-term construction contract, revenue is recognized when the job is completed, not when progress billings are collected or when they exceed recorded costs.
When the “percentage of completion” method of recording revenue is used, engineering estimates of completion or “costs incurred to date” vs. “total estimated costs” is the basis for recognizing revenue, not progress billings.

Question 4

Rule of conservatism

Answer 4

Recognizing anticipated loss on on both completed contract and %of completion method

Question 5

the completed contract method and gross profit

Answer 5

under the completed contract method. Although Gross Profit is not recognized the project is completed, you have to check for potential loss (the cost incurred is higher the original contract price).

Question 6

Gross profit calculation under the % of completion method.

Answer 6

1- calculate total gross profit
= contract price - estimated total cost
2= Calculate % of completion:
= cost incurred to date/(estimated total cost to complete the project)

Question 7

The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of:

Answer 7

The formula to calculate the percentage of completion is:

Total cost to date/ Total estimated cost

Question 8

How to find whether a current liability or current asset exists on a % of completion method

Answer 8

1- Calculate Gross profit on project
= Contract Price - total cost to complete the project
2- calculate ( actual cost on project to date + Gross profit to date) - Excess progress billing.
if the result is +, therefore it’s a current asset. If the result is -, therefore it’s a liability.