Section 23 - Long-term Construction Contracts

Question 1

What are the two methods of accounting for Long-term construction contracts under GAAP?

Answer 1

1) Percentage of Completion Method aka Stage of Completion

2) Completed-contracted Method

Question 2

When is it appropriate to use the Percentage of Completion Method?

Answer 2

When collection is assured, when costs to complete the contact and estimates of progress toward the completion of the contract are reasonably dependable.

GAAP, IFRS and IRS preferred

Question 3

Which principle does the Percentage of Completion Method align with?

Answer 3

Revenue recognition principle and better MATCHING

Question 4

When is profit recognized for both the Percentage of Completion Method and the Completed-contract Method?

Answer 4

1) Percentage of Completion Method - profit is recognized in each period of the profit
2) Completed-contract Method - NO profit is recognized until the job is finished. This violates the “matching concept”.

Question 5

How is profit calculated for Percentage of Completion Method?

Answer 5

4 steps

1) Total contract - estimated total cost = estimated total profit
2) Costs to date / estimated total cost** = % of completion
3) Estimated total profit x % of completion = GP to date
4) GP to date - GP previously recognized = profit to recognize this year

JE for recognizing profit
CIP
Income

Question 6

How are Billings and CIP reported on the Balance Sheet at year end?

Answer 6

Netted to report either:

Current Asset (Costs + Profit in excess of billing)

Current Liability (Billings in excess of costs + profits)

Question 7

What are the JEs for Percentage of Completion Method?

Answer 7

Billings
A/R
Billings (current liability)

Cash is collected
Cash
A/R

Costs are incurred
Construction in Progress (CIP - current asset)
Cash

Profits recognized
CIP
Income

Question 8

When are anticipated losses under Percentage of Completion Method and Completed-contracted Method recognize?

Answer 8

Always immediately on the I/S

Question 9

When is it appropriate to use the Completed-contracted Method?

Answer 9

When percentage of completion cannot be determined and total costs cannot be estimated.

Question 10

How are billings and costs accounted for under the Completed-contracted Method?

Answer 10

Same as the Percentage of Completion Method except profits are not recognize until the job is finished.

• still accumulate costs in the CIP account
• billings still accumulated in Billings account
  
  • at year end, still net CIP and Billings same as Percentage of Completion Method

Question 11

Under IFRS, what method is allowed for Long-term construction contracts?

Answer 11

Percentage of Completion Method

Question 12

Under IFRS, if revenues cannot be estimated reliably, which method is used for long-term construction contracts?

Answer 12

Cost Recovery Method