FAR-Long Term Contracts

Question 1

What kind of an asset is the CIP (Construction In Progress) Account?

Answer 1

Current Asset

Question 2

What is created when CIP is greater than Billings?

Answer 2

A current asset

Question 3

What is created when CIP is less than billings?

Answer 3

A current liability

Question 4

When are anticipated losses recognized?

Answer 4

Under either method, anticipated Losses are always recognized immediately.

Question 5

What method recognizes income throughout the life of the project?

Answer 5

Percentage of Completion Method. The Completed Contract Method does not recognize income until the contract has been completed.

Question 6

How is profit calculated under the Percentage of Completion Method?

Answer 6

Costs Incurred to Date/Total Construction Costs = Percentage of Completion

Percentage of Completion*Total Profit = Profit Recognized to Date

Profit Recognized to Date - Profit Recognized in previous years = Profit to recognize this year

Question 7

What makes up Total Construction Costs?

Answer 7

Actual Costs + Costs estimated to Complete

Note: This is not an error

Question 8

What is the difference between ‘estimated to complete’ and ‘estimated at complete’?

Answer 8

‘At Complete’ is total costs

‘To Complete’ are costs from today till complete. Is separate from ‘Actual Costs’ and is added to ‘Actual Costs’ to get ‘Total Construction Costs’.

Question 9

Which criteria must be met to use the percentage of completion method?

Answer 9

• Dependable estimates can be made of contract revenues, costs, and progress toward completion
• The contract clearly specifies the enforceable rights
• The buyer can be expected to satisfy obligations
• The contract can be expected to perform their obligations

Question 10

What two items are included in the Construction in Progress (CIP Account)?

Answer 10

Costs, and profits

Question 11

When is profit recognized under the Completed Contract Method?

Answer 11

All income from the contract is related to the year of completion, even though only a small part of the earnings may be attributable to effort in that period.

Question 12

What is the Cost Recovery Method?

Answer 12

Profit is not recognized until all costs have been covered through cash receipts. After all costs have been recovered, future cash receipts can be applied towards revenue.

Question 13

If a receivable is subject to subordination, what method is used to recognize revenue?

Answer 13

The cost recovery method

Question 14

When is an asset created under the Percentage of Completion method?

Answer 14

When CIP>Billings

Costs + Profit in excess of billings

Question 15

When is a liability created under the Percentage of Completion Method?

Answer 15

When Billings>CIP

Billings + in excess of costs + profits

Question 16

What is the purpose of the Percentage of Completion Method?

Answer 16

Revenues earning and expenses are realized based on the percentage of the construction job completed. This creates better matching.

Question 17

What are the two criteria when the Completed Contract Method be used?

Answer 17

Two criteria:

• Percentage-of-completion cannot be determined
• Total costs cannot be estimated