Chapter 2 Section 2: Long-Term Construction Contracts

Question 1

What methods for reporting long-term construction contracts are acceptable under GAAP and IFRS?

Answer 1

GAAP: completed contract and percentage of completion
IFRS: percentage of completion

Question 2

Describe the completed contract method

Answer 2

Recognize income only on completion of the contract.

Any expected losses are recognized immediately - rule of conservatism

Question 3

What are the progress billings and construction in progress accounts?

Answer 3

They are used in completed contract, and represent a contract asset. They are similar to inventory

Question 4

How are billings and cash received handled under completed contract?

Answer 4

Credit to advances on construction in progress (liability)

Question 5

Describe the percentage of completion method

Answer 5

Cost incurred/total expected costs = 
work done/total work=
% of job earned
Multiply that percentage by gross profit. Exclude what you recognized in prior years.
Recognize losses immediately