Long Term Construction Contracts

Question 1

Under the completed contract method, revenue is recognized

Answer 1

when complete

Question 2

percentage-of-completion

Answer 2

Contract price	
  Cost to date	
  Estimated cost to complete	600,000
  Total cost	
  Expected gross profit	
 Percentage complete
  Profit to date	
  Profit previously recognized
  Year 2 profit

Question 3

When a company uses the “percentage-of-completion” method of accounting

Answer 3

income previously recognized would be used to calculate the income recognized in the second year (but not progress billings to date)

Question 4

When a company uses the U.S. GAAP “completed contract” method to account for a long-term construction contract, revenue is recognized

Answer 4

the job is complete

Question 5

under both the percentage-of-completion method and the completed-contract method, operating income

Answer 5

decreases

Question 6

Under the percentage-of-completion method, annual gross profit equals

Answer 6

[total cost incurred/total expected cost] × [total expected gross profit] less total gross profit previously recognized. In the final year of the contract, actual rather than expected amounts are used.

Question 7

% completion calc

Answer 7

Step 1 - compute G/P of total contract
Total contract sales price $18,000
Less total estimated costs ( 16,200 )
Total gross profit $1,800

Step 2 - compute % of completion
Costs incurred (to date)            $5,400             = 1/3 CMP
Estimated cost to complete     10,800                = 2/3
Total estimated costs              $16,200               = 100%

Step 3 - compute G/P earned to date
Total contract gross profit $1,800
x % of completion 1/3
G/P earned to date $600

Question 8

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

Answer 8

Cost Incurred to date / Total Estimated Cost of Contract

Question 9

If the sum of cumulative costs incurred plus cumulative gross profit recognized exceeds cumulative billings

Answer 9

the excess is reported as a current asset

Question 10

If cumulative billings exceeds the sum of cumulative costs incurred plus cumulative gross profit recognized, .

Answer 10

the difference is reported as a current liability

Question 11

If the two amounts are equal,

Answer 11

no asset or liability is recognized.