Flashcards in Section 23 - Long-term Construction Contracts Deck (12):
What are the two methods of accounting for Long-term construction contracts under GAAP?
1) Percentage of Completion Method aka Stage of Completion
2) Completed-contracted Method
When is it appropriate to use the Percentage of Completion Method?
When collection is assured, when costs to complete the contact and estimates of progress toward the completion of the contract are reasonably dependable.
GAAP, IFRS and IRS preferred
Which principle does the Percentage of Completion Method align with?
Revenue recognition principle and better MATCHING
When is profit recognized for both the Percentage of Completion Method and the Completed-contract Method?
1) Percentage of Completion Method - profit is recognized in each period of the profit
2) Completed-contract Method - NO profit is recognized until the job is finished. This violates the "matching concept".
How is profit calculated for Percentage of Completion Method?
1) Total contract - estimated total cost = estimated total profit
2) Costs to date / estimated total cost** = % of completion
3) Estimated total profit x % of completion = GP to date
4) GP to date - GP previously recognized = profit to recognize this year
JE for recognizing profit
How are Billings and CIP reported on the Balance Sheet at year end?
Netted to report either:
Current Asset (Costs + Profit in excess of billing)
Current Liability (Billings in excess of costs + profits)
What are the JEs for Percentage of Completion Method?
Billings (current liability)
Cash is collected
Costs are incurred
Construction in Progress (CIP - current asset)
When are anticipated losses under Percentage of Completion Method and Completed-contracted Method recognize?
Always immediately on the I/S
When is it appropriate to use the Completed-contracted Method?
When percentage of completion cannot be determined and total costs cannot be estimated.
How are billings and costs accounted for under the Completed-contracted Method?
Same as the Percentage of Completion Method except profits are not recognize until the job is finished.
-still accumulate costs in the CIP account
-billings still accumulated in Billings account
-at year end, still net CIP and Billings same as Percentage of Completion Method
Under IFRS, what method is allowed for Long-term construction contracts?
Percentage of Completion Method