Long term construction contracts

Question 1

Two methods

Answer 1

Completed contract method

percentage of completion method

Question 2

Completed contract method

Answer 2

US GAAP

Question 3

Income reognition

Answer 3

When the contract is complete or substantially complete

Question 4

Substantially complete

Answer 4

contract is considered substanitally complete if remaining costs are insignificant

Question 5

Acceptable to use completed contract method when

Answer 5

1) Difficult to estimate costs of a contract in progress
2) there are many contracts in progress so that an equal amount are completed each year and unequal income is not recognized each year
3) projects are of short duration and the collections are not certain

Question 6

Two accounts

Answer 6

Progress billings and construction in progress- represent the same contract asset and should be shown net of their related contra accounts; liability account is advances account

Question 7

progress billing or construction in progress

Answer 7

billing performed without billing actual time or expenses; put in the software even before work is performed

Question 8

Current Asset Accounts

Answer 8

a/r and cost of completed contracts in excess of progress billings that means you’ve performed more work than what youve billed the customer for

Question 9

Current Liability Account

Answer 9

Progress billings on uncompleted contracts in excess of costs; bill more than what you’ve completed

Question 10

Measured

Answer 10

Completion= cost incurred

Question 11

Applicable overhead and direct costs

Answer 11

should be charged to a construction in progress or an asset account

Question 12

Billings and or cash received

Answer 12

should be credited to advances on construction in progress account or liability

Question 13

Gross profit or loss

Answer 13

contract price- total costs; except loss recognize like complete
2 years in a row -> year 1 loss; year 2 remove loss from prev year

Question 14

at interim balance sheet dates

Answer 14

both the asset and the liability accounts are classified as current

Question 15

conservatism

Answer 15

losses should be recognized in full in the year they are discovered; calculated by using the recorded costs to date + estimated costs

Question 16

Advantage

Answer 16

based on final results and not estimates

Question 17

Disadvantage

Answer 17

does not properly match the matching principle

Question 18

IFRS

Answer 18

this method cannot be used, if the final outcome of the project cannot be reliably estimated, the cost recovery method is used and revenue can only be recognized to the extent that cash collected exceeds the costs incurred

Question 19

Percentage of completion methods

Answer 19

Gaap and IFRS

Question 20

Income recognition

Answer 20

recognize income as work progresses on the contract

Question 21

Exception to the basic realization principle

Answer 21

based on the evidence that ultimate proceeds are available and the consensus that a better measure of periodic income results by the principle of matching revenue and costs

Question 22

Determination of revenues recognized

Answer 22

costs incurred TO DATE/total estimated costs

Question 23

Loss conservatism

Answer 23

provision for loss on the entire contract made when current estimates of a the total contract costs indicate a loss; loss recognized immediately in the year in which it is discovered. any prior year profit or loss must be adjusted for when calculating total estimated loss.

Question 24

Current Asset

Answer 24

A/R; costs and estimated earnings of uncompleted contracts is excess of progress billings or the bill

Question 25

Current Liability

Answer 25

Progress billings in excess of cost and estimated earnings on uncompleted contracts

Question 26

Advantage

Answer 26

Reflects matching principle

Question 27

Disadvantage

Answer 27

relying on estimates

Question 28

Journal entry

Answer 28

Debit construction in progress account and credit realized gross profit

Question 29

Calc

Answer 29

1) Est GP = Contract Price -Est Total Cost
2) % completion = (total cost to date/ total estimated cost of contract)
3) Gross profits earned till date = Step 1 * Step 2
4) Gross profit earned till date - gross profit bb = current year to date gp

Question 30

Problem on page 32**

Answer 30

When there is a loss (step 1 is negative) 100% of that amount is recognized; if you previoulst recognized 200 of loss and this year loss is 300 then only need to recognize an additional 100 in loss this year

Question 31

Problem on page 32***

Answer 31

completed contract- don’t recognize anything till either loss or complete the contract

Total GP:
If profit then %
that gives you total estimable costs - remove profits or losses from all previous years

if loss whole thing but then remove stuff from all previous years so if 200 loss this year and 600 profit prior year
then -200-600–> loss 800

Question 32

total est cost to complete

Answer 32

year 2 includes cost of year 1 + actual year 2 costs + est costs at yr 2