Flashcards in FAR-Long Term Contracts Deck (17):
What kind of an asset is the CIP (Construction In Progress) Account?
What is created when CIP is greater than Billings?
A current asset
What is created when CIP is less than billings?
A current liability
When are anticipated losses recognized?
Under either method, anticipated Losses are always recognized immediately.
What method recognizes income throughout the life of the project?
Percentage of Completion Method. The Completed Contract Method does not recognize income until the contract has been completed.
How is profit calculated under the Percentage of Completion Method?
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
What makes up Total Construction Costs?
Actual Costs + Costs estimated to Complete
Note: This is not an error
What is the difference between 'estimated to complete' and 'estimated at complete'?
'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'.
Which criteria must be met to use the percentage of completion method?
*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
What two items are included in the Construction in Progress (CIP Account)?
Costs, and profits
When is profit recognized under the Completed Contract Method?
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.
What is the Cost Recovery Method?
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.
If a receivable is subject to subordination, what method is used to recognize revenue?
The cost recovery method
When is an asset created under the Percentage of Completion method?
Costs + Profit in excess of billings
When is a liability created under the Percentage of Completion Method?
Billings + in excess of costs + profits
What is the purpose of the Percentage of Completion Method?
Revenues earning and expenses are realized based on the percentage of the construction job completed. This creates better matching.