Long-term Construction Contracts

Question 1

Completed contract method

Answer 1

Recognizes income only on completion (or substantial completion) of the contract

Question 2

When is it acceptable to use the completed contract method?

Answer 2

1. When it is difficult to estimate the costs of a contracts in progress
2. When 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. When the projects are of short duration, and collections are not assured

Question 3

Under completed contract, how should the excess of accumulated costs over related billings be reflected in the BS?

Answer 3

Current asset

Question 4

Under completed contract, how should the excess of accumulated billings over related costs be reflected in the BS?

Answer 4

Current liability

Question 5

Current asset accounts under completed contract

Answer 5

1. Due on accounts (receivable)

2. Cost of uncompleted contracts in excess of progress billings (construction in progress => like inventory)

Question 6

Current liability account under completed contract

Answer 6

Progress billings on uncompleted contracts in excess of cost (i.e. excess billings, retainer or deposit)

Question 7

What should applicable overhead and directs costs be charged to under completed contract?

Answer 7

Construction in progress account (asset)

Question 8

What should billings and/or cash received be credited to?

Answer 8

Advances on construction in progress account (liability)

Question 9

At completion of a contract, how is gross profit/loss calculated?

Answer 9

Contract price - Total costs = Gross profit/loss

Question 10

How is an expected loss on the total contract (completed contract) determined?

Answer 10

By:

1. Adding estimated costs to complete to the recorded costs to date to = total contract costs
2. Adding to advances any additional revenue expected to = total contract revenue
3. Total contract costs - Total contract revenue = Total estimate loss on contract

Question 11

What method must be used under IFRS?

Answer 11

Percentage-of-completion method unless final outcome cannot be reliably estimated (then cost recovery method required)

Question 12

When is it appropriate to use percentage-of-completion method?

Answer 12

When collection is assured and the entity’s acct system can:

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

Question 13

Under the percentage-of-completion method, how is recognition of revenue determined?

Answer 13

Income recognized = percentage of estimated total income either:

1. That incurred costs to date bear to total estimated costs based on the most recent cost info, or
2. That may be indicated by such other measure of progress toward completion

Question 14

Current asset accounts under percentage-of-completion

Answer 14

1. Due on accounts (receivable)

2. Costs and estimated earnings of uncompleted contracts in excess of progress billings (construction in progress)

Question 15

Current liability account under percentage-of-completion

Answer 15

Progress billings in excess of cost and estimated earnings on uncompleted contracts

Question 16

How should “progress billings” and “construction in progress” accounts be reported?

Answer 16

Net of their related contra accounts

Question 17

Under percentage-of-completion method, how is gross profit recognized?

Answer 17

1. Compute gross profit of completed contract
2. Compute % of completion
3. Compute gross profit earned (profit to date)
4. Compute gross profit earned for current year

Question 18

Under percentage-of-completion method, when is an estimated loss on the total contract recognized?

Answer 18

Immediately in the year it is discovered

Question 19

Under the completed contract method, when is revenue recognized?

Answer 19

When the job is complete

Question 20

Formula for calculated annual gross profit under percentage-of-completion

Answer 20

[Total cost incurred/Total expected cost] x [Total expected gross profit] - Total gross profit previously recognized

Question 21

What ratio is included in the calculation of income recognized under percentage-of-completion method?

Answer 21

Total costs incurred to date / Total estimated cost of contract

Question 22

Under percentage-of-completion method, when calculating net current asset/net current liability, do you use current or cumulative figures?

Answer 22

Cumulative