M1 Construction contracts

Question 1

What method of revenue recognition does a long-term construction contract use?

Answer 1

The input method

Question 2

When is construction contract revenue recognized over time?

Answer 2

1. The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced
2. The entity’s performance does not create an asset with alternative use to the entity, and they have enforceable right to receive payment for performance completed to date

Question 3

What are the 4 steps to calculate gross profit for long-term construction contracts with revenue recognized over time?

Answer 3

1. Compute gross profit of completed contract
   Gross profit = Contract price - estimated total costs
2. Compute % of completion
   Total cost to date / total estimated cost of contract
3. Compute gross profit earned
   Gross profit * % of completion = PTD
4. Compute gross profit earned for current year
   current PTD - PTD at beginning of period = Current year to date GP

Question 4

If a gross loss is recognized how does revenue recognized over time differ from revenue recognized at a point int time?

Answer 4

If a loss is recognized using the revenue recognized over time method, previously recognized gross profit must be unwound in the year of the loss increasing the current year gross loss

if a loss is recognized using the revenue recognized at a point in time method, then no previous gain had been reported and only the current loss is reported.

Question 5

What is a difference between construction revenue recognized at a point in Time and over time

Answer 5

At a point in time does not include gross profit as part of construction in progress

Question 6

How are each of the following reflected on the Balance Sheet?

1. Construction costs and accumulated gross profit
2. Billings on construction

Answer 6

1. Construction in progress - inventory
2. Progress billings - contra inventory

Question 7

How is an expected loss on total contract determined?

Answer 7

1. Adding to advances any additional revenue expected
2. Adding estimated costs to complete to the recorded costs to date
3. Subtracting 2 from 1

Question 8

What is the JE to record construction costs

Answer 8

DR Construction in progress
CR Materials, cash

Question 9

What is the JE to record billings on contract

Answer 9

DR A/R
CR Progress billings on construction contract

Question 10

What is the JE to record estimated gross profit during construction

Answer 10

DR construction expense
DR Construction in progress
CR Revenue from LT construction contracts*

Question 11

What is the JE to close construction accounts (revenue recognized over time)

Answer 11

DR Progress billings
CR Construction in progress

Question 12

What is the JE to close construction accounts (revenue recognized at a point in time)

Answer 12

Close billings to revenue
DR Progress billings
CR Revenue

Close construction in progress to expense
DR Cost of LT construction contract
CR Construction in progress

Question 13

what is the JE to record billings on contracts?

Answer 13

DR Contracts receivable
CR Progress Billings

Question 14

What is the final JE once the project is completed?

Answer 14

Close out the total amount billed
DR Progress billings
CR Revenue

Close out total costs
DR Construction expense
CR Construction in progress

Question 15

What is the JE to record revenue / costs (only for revenue recognized over time)

Answer 15

DR Construction expense
DR Construction in progress (gp %)
CR Revenue

Question 16

What is the JE once a construction contract is complete to close out progress billings and construction in progress?

Answer 16

DR Progress billings (total bill amount)
CR Revenue

	DR Construction Expense (total costs)
            CR Construction in progress