Long-Term Construction Contracts

Question 1

Two methods of construction contracts?

Answer 1

• Completed Contract Method (US GAAP Only)

- Percentage of Completion Method (IFRS and US GAAP)

Question 2

What is complete contract method?

Answer 2

Recognize the income only on completion of the contract.

The contract is complete if the remaining costs are insignificant.

Question 3

What are the requirements to use completed contract method ?

Answer 3

• When its difficult to estimate costs of contract in progress
• muchos contratos se terminan en ese año por lo que no se reconoce un ingreso desigual
• projects are short duration and collections are not assured

Question 4

How is presented on Balance Sheet?-Completed Contract

Answer 4

• Excess of accumulated cost- current asset (Progress Billing < construction in progress)
• Excess of accumulated billings- current liability (Progress Billings> construction in progress)

Question 5

Applicable overhead and direct cost should charge on what accounts? completed contract method

Answer 5

-construction in progress account

Question 6

Billings and cash receive should be credited?completed contract method

Answer 6

-To advances in progress account

Question 7

Formula to determine gross profit-completed contract?

Answer 7

= Contract Price - Total costs

Question 8

How is recognize the losses? completed contract

Answer 8

In the full year they are discovered. Is determined by: (Revenue of total contract - total costs)= Gain/Loss

Question 9

How is Cost recovery method?

Answer 9

-revenue is recognize only when the cash received exceed the cost of contract

Question 10

Requirements of percentage of completion?

Answer 10

• el cobro tiene q ser razonablemente asegurable
• cuando se puede razonablemente estimar una ganancia
• Se puede hacer un estimado razonable del progreso de la construcción

Question 11

Method used by IFRS?

Answer 11

• Percentage of completion

- Cost recovery method

Question 12

Ho we recognize revenue under percentage of completion?

Answer 12

1- revenues are recognize when:
*earning process is complete or virtually complete
*an exchange has taken place
2-recognize income as work progresses on the contract
3-is an exception of the basic realization principle because they want to provide better measure regard matching principle

Question 13

Percentage of completion does not include as completion?

Answer 13

• Subcontracts costs

- material not used

Question 14

when a loss is indicated on a total contract that is part of a group of contacts how is treated?

Answer 14

the group is treated as a unit

Question 15

What is the Step 1 of percentage of completion?

Answer 15

Contract Price- Estimated Total Cost = Gross Profit

Question 16

What is the Step 2 of percentage of completion?

Answer 16

Total Cost to date/ Total estimated cost of contract= % of completion

Question 17

What is the Step 3 of percentage of completion?

Answer 17

Gross Profit X % of completion= Profit to date

Question 18

What is the Step 4 of percentage of completion?

Answer 18

Profit to date - cualquier ganancia reconocida en periodo anteriores= Current year to date gross profit

Question 19

Any change in method in long-term contracts how is treated?

Answer 19

As a change in principle.

Is reported retrospectively

Question 20

What is construction in progress account? and Journal entry?

Answer 20

all the cost incurred in the construction
Construction in progress
Cash

Question 21

What is the progress billings? Journal Entry?

Answer 21

• cuando se va facturando al cliente
• cuenta control para que no se le sobre-facture al clienteProgress Billing Receivable
  Progress Billing on Construction in Progress

Question 22

Year-End Journal Entry in Percentage of completion?when completed do this entry?

Answer 22

Construction in progress(también tiene la ganancia)
Cost of Sale
Revenue

Completed contract do this entry at the end of the contract