Revenue Recognition Flashcards
The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage of completion method includes the ratio of:
Total costs incurred to date to total estimated costs.
At the end of the third year of a contract, total estimated project cost exceeds the contract price. In both of the first two years, the firm recognized gross profit on the contract under percentage of completion. What is the ending balance in the construction-in-progress account at the beginning of year four on the contract under the percentage-of-completion method (PC), and under the completed-contract method (CC), had that method been used?
An overall loss is expected, because total estimated cost exceeds contract price. Under PC, the construction-in-progress account is increased by cost and gross profit. If the gross profit is negative (an overall loss), the loss is subtracted from construction in progress. The loss recognized in the year as overall loss becomes evident includes any previous profit. Therefore, the previously recognized gross profit is removed when the total loss is recognized. Under CC, the same idea applies, except that there is no gross profit from previous years to remove. The ending construction-in-progress balance is the same for both methods.
