When are anticipated losses on long-term construction contracts recognized?
Immediately
What are the two methods for recognizing profit earned on a long-term contract?
Completed contract method: Under the completed contract method, profit is recognized only at the completion of the contract. Any expected losses that may be incurred must be recognized in the period when they become known. Percentage-of-completion method: Under the percentage-of-completion method, profit is recognized as it is earned throughout the process of completing the project. Like the completed contract method, any expected losses that may be incurred must be recognized in the period when they become known.
What additional journal entry does the percentage-of-completion method have that the completed contract method does not?
Dr. Construction in Progress Cr. Construction Gross Profit (can use the net of expense and revenue)
For the percentage-of-completion method, what financial statement element is construction in progress identified as?
Current Asset
Do progress billings or cash receipts affect the percentage of completion calculation?
No
For the percentage-of-completion method, if cost and profit (CIP) exceed billings, is there a current asset or liability balance?
Current Asset
Is it a change in accounting principle or estimate when we switch from the completed contract to the percentage-of-completion method?
Principle, so retrospective treatment is needed
For long-term construction contracts, what journal entry records construction costs?
Dr. Construction in Progress Cr. Cash (and/or Accounts Payable)
How do Estimated Costs at Completion differ from Estimated Costs to Completion?
Estimated Costs at Completion is the aggregate figure that includes both total costs incurred to date and Estimated Costs to Complete
For long-term construction contracts, what method is preferred when collection is assured?
Percentage-of-completion
For the percentage-of-completion method, what financial statement element are billings (aka, progress billings) identified as?
Current Liability
For the percentage-of-completion method, if billings exceed cost and profit (CIP), is there a current asset or liability balance?
Current Liability
What is the formula to recognize profit in the current period under the percentage-of-completion method?
[Costs Incurred to Date ÷ (Total Costs Incurred to Date + Estimated Costs to Complete)] x Expected Profit - Profit Previously Recognized