Long-Term Construction Contracts

Question 1

When does completed contract method recognizes income?

Answer 1

Only on completion

Question 2

What are the requirements to use completed contract method?

Answer 2

1. It is difficult to estimate the costs of a contract in progress
2. There are many contracts in progress so that about an equal number are completed in each year and an unequal recognition of income does not result.
3. The projects are short in duration, and collections are not assured

Question 3

What is the Balance sheet presentation of Completed Contract Method?

Answer 3

The excess of accumulated cost over related billings should be reflected in the balance sheet as a current asset, and the excess of accumulated billings over related costs should be reported as current liability

Question 4

Where are applicable overhead and direct costs charged?

Answer 4

Construction in progress account (an asset)

Question 5

Where are billings and/or cash received credited?

Answer 5

Advance on construction in progress account (a liability)

Question 6

How is gross profit determined under completed contract method?

Answer 6

Contract Price - Total Cost

Question 7

How is the excess of either the construction in progress or the advance account over the other classified under completed contract method?

Answer 7

It is classified as current because of the current operating cycle concept

Question 8

How is a loss recognized under the completed contract method?

Answer 8

Fully and in the year of discovery

Question 9

How is expected loss determined by under the completed contract method?

Answer 9

a. Adding estimated costs to complete to the recorded costs to date to arrive at total contract cost
b. Adding to advances any additional revenue expected to arrive at total contract revenue

Estimated Loss on contact= b - a

Question 10

What is the advantage of completed contract method?

Answer 10

It is based on final results rather than estimates

Question 11

What is the disadvantage of the completed contract method?

Answer 11

It does not properly reflect the mating principle

Question 12

What requirements should be met to use the percentage-of-completion method?

Answer 12

The accounting system can:

1. Reasonably estimate profitability
2. Provide reliable measure of progress toward completion

Question 13

When is revenue recognized under the percentage-of-completion method?

Answer 13

1. When the earnings process is completed or virtually complete
2. An exchange has taken place

Question 14

How is income recognized under percentage-of-completion method?

Answer 14

As work progresses on the contract

Question 15

How is the revenue recognized determined under the percentage-of-completion method?

Answer 15

1. Incurred costs to date bear to total estimated costs based on the most recent cost information
   OR
2. Other measure of progress toward completing appropriate work performed

Question 16

What should be done when current estimates of the total contract costs indicate a loss under the percentage-of completion method?

Answer 16

A provision for the loss on the entire contact should be made

Question 17

What is the advantage of percentage-of-completion method?

Answer 17

Accurate reporting of the status of the uncompleted contracts and the periodic recognition of income

Question 18

What is the disadvantage of percentage-of-completion method?

Answer 18

Percentage-of-completion method relays on estimates

Question 19

How is gross profit previous recognized treated when an estimated total contact loss has been discovered

Answer 19

It must be adjusted for when calculating the total estimated loss