Long-Term Construction Contracts Flashcards
What are the two methods by which an entity can report long-term constructions contracts?
percentage-of-completion method
completed contract method
An entity has a long-term construction contrat. In recognizing revenues, how does the entity know whether to use the percentage-of-completion method or the completed contract method?
if degree of completion can be made with reasonable accuracy percentage of completion MUST be used
the entity must be able to complete the remainder of the work, the buyer must be able to pay for the work
An entity is building a bridge for the state for $5 million. In Year 1, the entity spends $1 million and expects to spend another $3 million to complete the job.
If the percentage-of-completion method is applied, what increase in net income should be recognized in Year 1?
5 million in contract revenue
1 million spent and 3 million more expected
5 - 4 = 1 million profit
1/4 = 25% complete
1 million x .25 =250,000 income should be recognized
An entity is building a bridge for the state for $5 million. In year 1 the entity spends $1 million and recognizes a gain of $250,000. In year 2, the entity spends another $1.2 million and expects to spend an additional $2.2 million to complete the job.
Using the percentage-of-completion method, what should be the increase in net income in Year 2?
5 million in contract revenue
2.2 million spent and 2.2 million more expected
5 - 4.4 = 600,000 profit
2.2/4.4 = 50% complete
600,000 x .5 = 300,000 total income
300,000 - 250,000 previously recognized = 50,000 net income in year 2
An entity is building a bridge for the state for $5 million. In year 1 the entity spends $1 million and recognizes a gain of $250,000. The entity billed the state for $900,000 and collected $800,000.
How much profit is recognized based on the billings? How much profit is recognized based on the cash collection?
profits are not recognized based on billions or cash collection in long-term contracts
An entity is building a bridge for the state for $5 million. In year 1 the entity spends $1 million and recognizes a gain of $250,000. The entity billed the state for $900,000 and collected $800,000.
What is recognized for this asset on the entity’s B/S?
Construction-in-progress = 1.25 million
Progress Billings = 900,000
netted to 325,000 asset
An entity is building a bridge for the state for $5 million. In year 1 the entity spends $1 million and recognizes a gain of $250,000. The entity billed the state for $1.4 million,.
What is recognized for this project on the entity’s B/S?
Construction-in-progress = 1.25 million
Progress Billings = 1.4 million
netted to 150,000 liability
An entity has a contract to build a bridge for the state at a price of $5 million. During year 1, the entity spends $3.3 million and expects to spend another $2.2 million to complete the project.
If the entity uses the percentage-of-completion method, what income effect should be recognized in Year 1?
$5 million contract revenue
3.3 million spent and 2.2 expected costs
5 - 5.5 = (500,000)
a loss should be recognized immediately in its entirety
An entity is building a bridge for the state for $5 million. In year 1 the entity spends $1 million and expects to spend another $3 million to complete the job.
If the completed contract method is applied, what increase in net income should be recognized in Year 1?
no profit is recognized in Year 1
Profits are only recognized when the job is finished.
An entity is building a bridge for the state for $5 million. In year 1 the entity spends $1 million and expects to spend another $3 million to complete the job. In year 2, another 2.9 million is expended, and the job is completed.
If the completed contract method is applied, what increase in net income should be recognized in Year 2?
$5 million contract revenue
1 million + 2.9 million = 3.9 million cost
5 - 3.9 = 1.1 million increase in income recognized in year 2
An entity has a contract to build a bridge for the state at a price of $5 million. During year 1, the entity spends $3.3 million and expects to spend another $2.2 million to complete the project.
If the entity uses the completed contract method, what income effect should be recognized in Year 1?
5 million contract revenue
3.3 + 2.2 = 5.5 cost
5 - 5.5 = (500,000)
losses anticipated are recognized immediately under the completed contract method.
