LT Contstruction Contracts

Question 1

completed contract (CC method)

Answer 1

GAAP only
recognize income only on (substantial) completion of contract

use when:

• difficult to estimate costs
• many contracts in progress (enough so unequal recognition of income doesn’t exist)
• project are of short duration, collections are not assured

Question 2

substantial completion

Answer 2

remaining costs are insignificant

Question 3

B/S presentation

CC method

Answer 3

accumulated costs > billings, reflect as current asset

accumulated billings > costs, reflect as current liability

Question 4

current asset accounts

CC/POC method

Answer 4

• due on accounts (receivable)
• costs (/and estimated earnings) of uncompleted contracts in excess of progress billings
• construction in progress

Question 5

current liability account

CC/POC method

Answer 5

• progress billings on uncompleted contracts in excess of cost (/and estimated earnings)
• excess billings
• retainer or deposits

Question 6

OH and direct costs

accounting for CC method

Answer 6

charged to construction in progress account (net is current asset)

Question 7

billings/cash received

accounting for CC method

Answer 7

credited to advances on construction in progress account (net is current liability)

Question 8

gross profit/loss

accounting for CC method

Answer 8

= contract price - total costs

Question 9

losses on contract

CC method

Answer 9

recognized in full in year discovered

= total contract costs - total contract revenue

total contract costs = estimated costs to complete
+ recorded costs to date

total contract revenue = advances
+ addition revenue expected

Question 10

advantages of CC method

Answer 10

based on final results rather than estimates

Question 11

disadvantages of CC method

Answer 11

does not properly reflect matching principle when period of contract is over a year

Question 12

LT construction contracts methods

GAAP vs IFRS

Answer 12

GAAP
- CC method

IFRS

• CC method not allowed
• POC method required
• cost recovery method if POC cannot be used

Question 13

cost recovery method

Answer 13

used under IFRS if POC not applicable

revenue recognized to extent that cash collected > costs

Question 14

percentage of completion (POC method)

Answer 14

GAAP and IFRS

used when:

• collection is assured
• profitability reasonably estimated
• reliable measure of progress toward completion

Question 15

revenue recognition

POC method

Answer 15

recognized as work progresses on contract

revenues generally recognized when:

• earnings process is (virtually) complete AND
• exchange has taken place

Question 16

calculation of income

POC method

Answer 16

percentage of job earned

= costs incurred (work done)
/ total expected cost (work)

Question 17

all or portion of costs can be excluded if…

Answer 17

exclusion would produce a more meaningful allocation of periodic income

Question 18

losses on contract

POC method

Answer 18

provision is made when current estimates of total contract costs indicate a loss

income recognized at various stages should not ordinarily be measured by interim billings

Question 19

advantages of POC method

Answer 19

• accurate reporting of status of uncompleted contracts

- periodic recognition of income as contract is completed

Question 20

disadvantages of POC method

Answer 20

necessity of relying on estimates of ultimate costs

Question 21

gross profit/loss

accounting for POC method

Answer 21

= contract price

- est. total cost

Question 22

percentage of completion

accounting for POC method

Answer 22

= total cost to date

/ total est. cost of contract

Question 23

profit to date - PTD

accounting for POC method

Answer 23

= gross profit

x %age of completion

Question 24

gross profit for CY

accounting for POC method

Answer 24

= PTD at current FY

- PTD at beginning of period