Flashcards in Contract Accounting Deck (13):
What two methods of Revenue Recognition are used in Long Term Contracts?
1.) Completed Contract Method - no profit recognized until the contract is complete
2.) Percentage of completion - Recognize profit in degree of completion
What method is used under international standards if the percentage of completion method is not appropriate?
Cost recovery (zero profit) method.
What is the amount of loss recognized in a period under the percentage of completion method when estimated total project cost exceeds contract price and gross profit was recognized in previous years?
Total project cost less contract price, plus gross profit recognized in previous years
Describe the nature of the construction in progress account.
Inventory account - a current asset
What is the percentage of completion of a project when an overall loss on the contract is expected?
Same as usual; total cost to date divided by total estimated project cost
What is the contra account to construction in progress?
The contra account is Billings on contracts
When is the balance in construction in progress the same for the percentage of completion method and completed contract method?
When an overall loss is expected on the contract
What is the accounting effect when a single period loss occurs on a contract expected to be profitable?
Total gross profit through the period is less than the gross profit recognized in earlier periods
Describe revenue recognition for the percentage of completion method
Recognize profit in proportion to degree of completion. Required if estimates of degree of completion at interim points can be made and reasonable estimates of total project cost can be made.
What is the amount of loss recognized in a period under the completed contract method when estimated total project cost exceeds contract price?
Overall loss; total project cost less contract price
Describe the revenue recognized under the percentage of completion for the second year of a contract
Total revenue through year two based on the percentage of completion through year two, less revenue recognized for year one
Why are billings on construction treated as a contra to construction in progress?
To avoid double counting of assets