Long Term Construction Contracts

Question 1

What are the two methods for recognizing profit earned on a long-term contract?

Answer 1

Completed contract method: Under the completed contract method, profit is recognized only at the completion of the contract. Any expected losses that may be incurred must be recognized in the period when they become known. Percentage-of-completion method: Under the percentage-of-completion method, profit is recognized as it is earned throughout the process of completing the project. Like the completed contract method, any expected losses that may be incurred must be recognized in the period when they become known.

Question 2

What is the formula to recognize profit in the current period under the percentage-of-completion method?

Answer 2

[Costs Incurred to Date ÷ (Total Costs Incurred to Date + Estimated Costs to Complete)] x Expected Profit - Profit Previously Recognized

Question 3

For long-term construction contracts, what journal entry records construction costs?

Answer 3

Dr. Construction in Progress

Cr. Cash (and/or Accounts Payable)

Question 4

For the percentage-of-completion method, what financial statement element are billings (aka, progress billings) identified as?

Answer 4

Current Liability

Question 5

For the percentage-of-completion method, what financial statement element is construction in progress identified as?

Answer 5

Current Asset

Question 6

For the percentage-of-completion method, if cost and profit (CIP) exceed billings, is there a current asset or liability balance?

Answer 6

Current Asset

Question 7

For the percentage-of-completion method, if billings exceed cost and profit (CIP), is there a current asset or liability balance?

Answer 7

Current Liability

Question 8

For long-term construction contracts, what method is preferred when collection is assured?

Answer 8

Percentage-of-completion

Question 9

When are anticipated losses on long-term construction contracts recognized?

Answer 9

Immediately

Question 10

What additional journal entry does the percentage-of-completion method have that the completed contract method does not?

Answer 10

Dr. Construction in Progress

Cr. Construction Gross Profit (can use the net of expense and revenue)

Question 11

Do progress billings or cash receipts affect the percentage of completion calculation?

Answer 11

No

Question 12

How do Estimated Costs at Completion differ from Estimated Costs to Completion?

Answer 12

Estimated Costs at Completion (EAC) is the aggregate figure that includes both total costs incurred to date and Estimated Costs to Complete (ETC)

Question 13

Is it a change in accounting principle or estimate when we switch from the completed contract to the percentage-of-completion method?

Answer 13

Principle, so retrospective treatment is needed