Revenue Recognition

Question 1

What are the two methods of Contract accounting?

Answer 1

Percentage of Completion method

Completed Contract Method

Question 2

What is the distinction between PC and CC methods?

Answer 2

PC

1. Revenue Recognition - Revenue, expenses and gross profit is recorded as the work is completed.
2. Realizability is not a concern
3. Used if total project cost is estimable

CC

1. Revenue Recognition - Recognize no revenue, expenses profit till the work is completed.
2. This method is used only when PC is not appropriate.

Similarity - The journal entries and FS presentation is similar for both the methods

Question 3

What are the features of contract accounting?

Answer 3

The accounting is very different

Seller performance is the last criterion to be me

Contracts are performed over 1 year period

Realizability is not an issue as most long term projects are financed by third parties.

Question 4

What are the three summary journal entries for CC and PC

Answer 4

Construction in progress(CIP)
Materials, cash etc

Accounts Receivable
Billings

Cash
Accounts Receivable

After calculating the percentage of profit the final journal entry for the year is:

CIP
Construction Cost
Construction Revenue

The CIP portion of the above entry represents profit recognized. It is added to CIp as a measure of Value Added.

Question 5

What is the nature of Construction in Progress (CIP) and billings account?

Answer 5

CIP: inventory account
Billings: Contra to CIP account (to avoid double entry)

Question 6

What is the PC fraction?

Answer 6

Cost incurred to date /Estimated total project cost

Estimated total project cost = cost to date + any remaining cost

It is used to recognize revenue and profit under PC method