Percentage-of-completion method

Question 1

When is appropriate to use Percentage of completion method for long-term construction contract?

Answer 1

1. when collection is assured, AND
2. Reasonably estimate profitability, AND
3. Provide a reliable measure of progress toward completion

Question 2

How is revenue calculated?

Answer 2

1. cost/ total expected cost

2. percentage from #1 x Gross profit (Contract $ - total expected cost)

Question 3

B/S presentation: Current asset accounts?

Answer 3

1. A/R
2. Costs of estimated earnings of uncompleted contracts (also called ‘construction in progress’)in excess of progress billings

Question 4

B/S presentation: Current liability accounts?

Answer 4

1. Progress billing in excess of cost and estimated earnings on uncompleted contracts.

Question 5

What is the major disadvantage of this method?

Answer 5

the principal disadvantage of the percentage of completion method is the necessity of relying on estimates of the ultimate costs

Question 6

What is the major advantage of this method?

Answer 6

accurate reporting of the status of the uncompleted contracts and the periodic recognition of income currently as contracts are completed

Question 7

How is loss treated with his method?

Answer 7

An estimated loss on the total contract is recognized immediately in the year it is discovered.

Question 8

FYI: Construction in progress = Profit + cost incurred

Answer 8

FYI: Construction in progress = Profit + cost incurred