ACCOUNTING FOR LONG-TERM CONSTRUCTIO N PROJECT

1.
a.
b.
c.
d.

In selecting an accounting method for a newly contracted long-term construction project, the
principal factor to be considered should be
the terms of payment in the contract.
the degree to which a reliable estimate of the costs to complete and extent of progress toward
completion is practicable.
the method commonly used by the contractor to account for other long-term construction contracts.
the inherent nature of the contractor's technical facilities used in construction.

It is a better match with legal ownership.

D.
It results in a lower income tax.

*.
The percentage-of-completion method of inventory valuation of long-term contracts
Recognizes income upon completion of work.
Recognizes income based on collected billings.
Recognizes income based on the progress of work.
d.
Does not recognize income at the balance sheet date.
RPCPA 1074
46.

2.
a.
b.

S, S & T

The accounting method that recognizes revenue prior to the point of sale based on either

The use of the percentage of completion method of accounting for long terman input or an output measure of the earning process is known as the
a.
Deposit method.
c. Installment sales method.
construction contracts is a measurement of revenue under the
Cost principle.
Realization principle

c. Objectivity principle.
. d.
Monetary principle.

b.

Cost recovery method.

d. Percentage-of-completion method
16.
RPCPA 0596

1
.
The percentage-of-completion method of accounting for long-term construction contracts
When work to be done and costs to be incurred on a long-term contract can be estimated
is
an
exception
to
the
CMA 1296 2-10
dependably, which of the following methods of revenue recognition is preferable?
A.
Matching
principle.
C. Economic-entity assumption.
a.
Installment method
c.
Completed-contract method
B.
Going-concern assumption.
D. Revenue recognition principle.
b.
Percentage-of-completion method d.
None of these

3.

4.
a.
b.
c.
5.
6.
a.
b.
c.
7.
8.
9.
i.
ii.

2
.
The percentage-of-completion method of accounting for long-term construction contracts
15.
Which of the following is not an element identified by the AICPA as being necessary in
is
an
exception
to
the
order to use percentage-of-completion accounting?
A.
Matching
principle.
C. Historical cost principle. CMA 0691 2-15
The construction period can be reasonably estimated.
B.
Going concern assumption.
D. Revenue recognition principle.
The buyer can be expected to satisfy obligations under the contract.
Dependable estimates can be made of the extent of progress toward completion.
44.
The percentage-of-completion method violates the general rule on revenue recognition
d.
Dependable estimates can be made of contract costs.
S, S & S
that:
Collection is reasonably assured.
9.
The profession requires that the percentage-of-completion method be used when certain
Costs are known or reasonably estimated.
conditions exist. Which of the following is not one of those necessary conditions?
The earnings process is complete.
Estimates of progress toward completion, revenues, and costs are reasonably dependable.
D.
Collections have been received.
S, S & T
The contractor can be expected to perform the contractual obligation.
The buyer can be expected to satisfy some of the obligations under the contract.
3
.
Although a transfer of ownership has not occurred, the percentage-of-completion method
d.
The contract clearly specifies the enforceable rights of the parties, the consideration to be
exchanged, and the manner and terms of settlement.
K, W & Wis acceptable under the revenue recognition principle because
The assets are readily convertible into cash.
Characteristics
The production process can be readily divided into definite stages.
Cash has been received from the customer.
45.
The rationale for adoption of the percentage-of-completion method is that:
Results are more conservative.
D.
The earning process is completed at various stages.
CMA 1292 2-17
It provides a measure of periodic accomplishment.

27.
28.
a.
b.
c.
29.
30.
31.
a.
b.
c.
32.
33.
34.

35.
36.
37.

38.
39.
40.

i.

Advantage of using Percentage-of-Completion Method

17.
The theoretical support for using the percentage-of-completion method of accounting for
long-term construction projects is that it
is more conservative than the completed-contract method.
reports a lower Net Income figure than the completed-contract method.
more closely conforms to the cost principle.
d.
produces a realistic matching of expenses with revenues.
S, S & S

As progress is made toward completion of the contract.

As cash is received.
D.
When the contract is completed.

CIA 1193 IV-28

Current Asset/Liability
Unbilled Revenues
*.
How should earned but unbilled revenues at the balance sheet date on a long-term
construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?
In a footnote to the financial statements until the customer is formally billed for the portion of the
Disadvantage of using percentage-of-completion
15.
The principal disadvantage of using the percentage-of-completion method of recognizing work completed.
b.
As a receivable in the noncurrent asset section of the balance sheet.
RPCPA 1096
revenue from long-term contracts is that it
is unacceptable for income tax purposes.
c.
As a construction in progress in the noncurrent asset section of the balance sheet.
d.
As construction in progress in the current asset section of the balance sheet.
gives results based upon estimates which may be subject to considerable uncertainty.
is likely to assign a small amount of revenue to a period during which much revenue was actually
Costs Of Uncompleted Contracts In Excess Of Related Billings
earned.
d.
none of these.
K, W & W
*.
Costs of uncompleted contracts in excess of related billings in most cases is shown as a
Current liability, i.e., Accounts Payable.
Applications
Long-term debt, i.e, Notes Payable.
4
Current assets, i.e., Receivables.
.
Saskia Co.s construction projects extend over several years, and collection of receivables
is reasonably certain. Each project has a firm contract price, reliable estimated of the extent of progress
d.
Investments, i.e., Construction in Progress.
RPCPA 1079
and cost to finish, and a contract that is specific as to the rights and obligations of all parties. The contractor
and the buyer are expected to fulfill their contractual obligations on each project. The method that the
Costs Of Uncompleted Contracts In Excess Of Related Costs
*.
Billings on uncompleted contracts in excess of related costs in most cases is shown as a
company should use to account for construction revenue is
a.
Installment sales.
c. Completed-contract.
Current liability, i.e., Accounts Payable.
Long-term debt, i.e., Notes Payable.
b.
Percentage-of-completion method.
d. Point-of-sale.
CIA 1185 IV-13
Current assets, i.e., Receivables.
d.
Investments, i.e., Construction in Progress.
RPCPA 1079
6.
Dilla Construction Company's projects extend over several years and collection of
receivables is reasonably certain. Each project has a contract that specifies a price and the rights and
Construction in Process
obligations of all parties. Both the contractor and the customer are expected to fulfill their contractual
obligations on each project. Reliable estimates can be made of the extent of progress and cost to complete
*.
The Construction-in-Process account accumulates the following when the percentage-ofcompletion method is used
each project. The method that the company should use to account for construction revenue is
a.
installment sales.
c. completed-contract.
Construction costs to date.
Construction costs to date less payments received.
b.
percentage-of-completion.
d. cost recovery.
S, S & S
Construction costs to date less billings to date.
5
d.
Construction costs plus gross profit earned to date.
RPCPA 0592
.
A building contractor has a fixed-price contract to construct a large building. It is estimated
that the building will take 2 years to complete. Progress billings will be sent to the customer at quarterly
19.
When the percentage-of-completion method of accounting for long-term construction
intervals. Which of the following describes the preferable point for revenue recognition for this contract if the
projects is used, why is Construction in Progress increased by the annual recognized gross profit on longoutcome of the contract can be estimated reliably?
term construction contracts?
After the contract is signed.

a.
b.
c.
58.

The cost of the contract has increased.

The project's value has increased above cost.
The economy experiences inflation over the construction period.
d.
Construction in Progress is not increased by the annual recognized profit.

d.

Net as a current asset if debit balance, and current liability if credit balance. RPCPA 1087

8.
If the Construction in Progress account has a balance of P1,000,000 while the Progress
S, S & SBillings on Contracts accounts balance is P800,000, how should these accounts be reflected on the
balance sheet?
59.
70.
In accounting for a long-term construction contract using the percentage of completion
Construction in Progress will be shown as a current asset.
b.
Progress Billings on Contracts will be shown as a current liability.
RPCPA 0598
method, the amount of income recognized in any year would be added to (E)
60.
A.
Deferred revenue
C. Construction in progress
c.
The difference between the two accounts will be reflected as a current asset.
d.
The difference between the two accounts will be reflected as a current liability.
61.
B.
Progress billings on contracts
D. Property, plant, and equipment
CPAR
62.
63.
64.
65.
67.
a.
b.
c.
68.
69.
a.
b.
c.
70.
71.
72.
a.
b.
c.

6
.
POC Company accounts for a long-term construction contract using the percentage-ofProgress Billings
36.
JUMBO Corp. uses the percentage-of-completion method of revenue recognition incompletion method. As of the end of the current fiscal year, the following information was available
regarding a project expected to be completed in the following year:
accounting for its long-term construction contracts. JUMBO Corp.s progress billings account is a
a.
Revenue account.
c. Non-current liability account.
Cumulative progress billings
80.
$400,000
b.
Contra current asset account.
d. Contra non-current asset account.
Cumulative costs incurred
82.
300,000
66.
RPCPA 0597
Cumulative revenues recognized
84.
80,000
The difference between construction in progress and progress billings should be reported in the
*.
Tay Co. uses the percentage-of-completion method to account for a five-year construction statement of financial position for the current year as
contract. Third year progress billings collected in the fourth year would
A current asset of $20,000.
Be included in the calculation of third year income.
A current liability of $20,000.
Be included in the calculation of third year income insofar as they exceeded second year billings
Unearned revenue of $100,000.
collected in the third year.
d.
A separate component of shareholders equity of $100,000.
Gleim
Be included in the calculation of fourth year income.
d.
Not be included in the calculation of third, fourth, or fifth year incomes. AICPA 0591 T-28
Gross Profit
12.
In accounting for a long-term construction-type contract using the percentage-of25.
A company uses the percentage-of-completion method to account for a four yearcompletion method, the gross profit recognized during the first year would be the estimated total gross profit
construction contract. Progress billings sent in the second year that were collected in the third year would from the contract, multiplied by the percentage of the costs incurred during the year to the
be included in the calculation of the income recognized in the second year.
a.
total costs incurred to date.
c. unbilled portion of the contract price.
be included in the calculation of the income recognized in the third year.
b.
total estimated cost.
d. total contract price.
K, W & W
be included in the calculation of the income recognized in the fourth year.
d.
not be included in the calculation of the income recognized in any year.
S, S & S
Recognized Profit
First Year
7
Construction in Progress & Progress Billings
.
A company uses the percentage-of-completion method of accounting for a 4-year
*.
In accounting for a long-term construction type contract, the two peculiar accounts used construction contract. Which of the following items should be used in the calculation of the income
are the progress billings and construction in progress accounts. As of year-end, but prior to the recognized in the first year?
completion of a long-term contract, how should the balance of these two accounts be shown?
AICPA, adapted
a.
b.
c.
d.
Progress billings as deferred income, construction in progress as a deferred income.
Progress Billings
Yes
Yes
No
No
Progress billings as income, construction in progress as inventory.
Collections on Progress Billings
Yes
No
No
Yes
Net, as an income from construction if credit balance, and loss from construction if debit balance.

109.

*.
Under the percentage of completion method, the net income to be recognized for the first
*.
A company used the percentage-of-completion method of accounting for a 5-year
year of a three-year construction contract is to be determined on the basis of the ratio of
construction contract. Which of the following items will the company use to calculate the income recognized
a.
Estimated cost to complete to total estimated costs.
in the third year?
b.
Costs incurred to date to total estimated costs.
AICPA 1192 T-8
a.
b.
c. 140.
d.
c.
Actual costs incurred to total estimated costs.
Progress billings to date
Yes
No
No
Yes
110.
d.
Total estimated costs to estimated costs to complete.
RPCPA 1086
Income previously recognized
No
Yes
No
Yes
111.

10
72.
In arriving at the gross profit during the first year using the percentage of completion
.
The calculation of the income recognized in the third year of a five-year construction
method of accounting for a long-term construction contract, the estimated total gross profit from the contract contract accounted for using the percentage-of-completion method includes the ratio of
is multiplied by (E)
Total costs incurred to date to total estimated costs.
i.
The percentage of the costs incurred during the year to the total contract price.
Total costs incurred to date to total billings to date.
ii.
The percentage of the costs incurred during the year to the total estimated cost
Costs incurred in year 3 to total estimated costs.
iii.
The percentage of the costs incurred during the year to the total costs incurred to date.
d.
Costs incurred in year 3 to total billings to date.
AICPA 1193 T-38
112.
D.
The percentage of the costs incurred during the year to the unbilled portion of the total
contract price. CPAR
Final Year
11
.
Which of the following is used in calculating the income recognized in the fourth and final
113.
Second Year
year
of
a
contract
accounted for by the percentage-of-completion method?
8
114.
.
A company used the percentage-of-completion method of accounting for a 4-year
AICPA 0595 F-26
a.
b.
c. 159.
d.
construction contract. Which of the following items should be used to calculate the income recognized in
Actual total costs
Yes
Yes
No
No
the second year?
Income previously recognized
Yes
No
Yes
No
AICPA 1192 T-8, RPCPA 0593
a.
b.
c.
d.
Income Previously Recognized
Yes
No
Yes
No
10.
Which of the following would be used in the calculation of the gross profit recognized in
Progress Billings to Date
Yes
Yes
No
No
the third and final year of a construction contract that is accounted for using the percentage-of-completion

130.

8.
If the percentage-of-completion method is used, what is the basis for determining the
gross profit to be recognized in the second year of a three-year contract?
a.
Cumulative actual costs incurred only.
b.
Incremental cost for the second year only.
c.
Cumulative actual costs and estimated costs to complete.
131.
d.
No gross profit would be recognized in year 2.
S, S & S

method?
S, S & S
Actual Contract Price
Total Costs
Income Previously Recognized

A.
Yes
Yes
No

B.
Yes
Yes
Yes

C.
Yes
No
Yes

D.
No
Yes
Yes

Anticipated Loss
40.
NATIONAL Corp. is faced with an impending loss on a long-term construction project and
132.
Third Year
has
asked
for
advice
on how to book the impending loss. Assuming that NATIONAL Corp. employs the
9
133.
.
The calculation of the income recognized in the third year of a 5-year construction contract
percentage-of-completion method, when should the loss be taken up in NATIONAL Corp.s books?
accounted for using the percentage-of-completion method includes the ratio of
Immediately.
a.
Total costs incurred to date to total estimated costs.
Over the period of the project.
b.
Total costs incurred to date to total billings to date.
Upon completion of the project.
c.
Costs incurred in year 3 to total estimated costs.
d.
When progress billings exceed contract costs incurred.
RPCPA 0597
134.
d.
Costs incurred in year 3 to total billings to date.
AICPA 1193 T-38

194.
195.
196.

Journal Entries
Revenue for long-term contracts
266.
2,000,000
Use the following to answer questions 58-60:
S, S & T
D. Accounts receivable
272.
1,000,000
273.
Moon View Desert Homes constructed a subdivision of upscale homes north of Cave Creek,
Cost of construction
274.
600,000
Arizona, during 2003 and 2004 under contract with Empire Development. Relevant data are summarized
Gross profit
275.
250,000
below:
Deferred revenue
276.
150,000
Contract Amount
$2,000,000
200.
2003201.
2004
COMPLETED-CONTRACT METHOD
Cost
203.
800,000
204.
600,000
Criteria
Gross Profit
206.
350,000
207.
250,000
14.
The completed-contract method of accounting for long-term construction-type contracts is
Contract Billings
209.
1,000,000
1,000,000
preferable when
211.
Moon View uses the percentage-of-completion method to recognize revenue.
a contractor is involved in numerous projects.
the contracts are of a relatively long duration.
212.
58.
What would be the journal entry made in 2003 to record revenue?
estimates of costs to complete and extent of progress toward completion are reasonably
A. Accounts receivable
216.
1,000,000
217.
dependable.
Revenue from long-term contracts
218.
1,000,000
d.
there are inherent uncertainties in the contract beyond normal business risks.
S, S & S
B. Accounts receivable
223.
1,350,000
224.
Gross profit
225.
350,000
Recognized Revenue
13
Revenue from long-term contracts
226.
1,000,000
.
The accounting method most clearly consistent with basic revenue recognition principles
C. Construction in progress
231.
350,000
233.
is the
Cost of construction
232.
800,000
A.
Percentage-of-completion method.
C. Completion-of-production method.
Revenue from long-term contracts
234.
1,150,000
B.
Installment sales method.
D. Completed-contract method.
Gleim
D. Accounts receivable
239.
1,000,000
241.
14
Billings in excess of cost
240.
350,000
.
A company uses the completed-contract method to account for a long-term construction
Revenue from long-term contracts
242.
1,350,000contract. Revenue is recognized when recorded progress billings
AICPA 0592 T-44
a.
b.
c. 290.
d.
12
243.
.
In its December 31, 2003 balance sheet, Moon View would report:
Are collected
Yes
No
Yes
No
i.
The asset, cost and profits in excess of billings of $150,000.
Exceed recorded costs
Yes
No
No
Yes
ii.
The liability, billings in excess of cost of $200,000.
iii.
The asset, contract amount in excess of billings of $1,000,000.
15
.
A company uses the completed-contract method to account for a long-term construction
iv.
The asset, deferred profit of $ 400,000.
contract. Revenue is recognized when progress billings are
244.

60.

What would be the journal entry to record revenue in 2004?

A. Accounts receivable
248.
1,000,000
Revenue for long-term contracts
250.
B. Construction in progress
255.
250,000
Cost of construction
256.
600,000
Revenue for long-term contracts
258.
C. Cost of construction
263.
1,400,000
Gross profit
264.
600,000

249.
1,000,000
257.

AICPA, Adapted
Recorded
Collected

a.
No
Yes

b.
Yes
Yes

c. 306.
Yes
No

d.
No
No

14.
Under the completed-contract method
revenue,
cost, and gross profit are recognized during the production cycle.
850,000
revenue and cost are recognized during the production cycle, but gross profit recognition is
265.
deferred until the contract is completed.
revenue, cost, and gross profit are recognized at the time the contract is completed.

318.
319.

d.

none of these.

K, W & W

the same balances each period in the Progress Billings account.

the same expense for cost of construction each year.
the same amount of income in the year of completion.
d.
the same inventory carrying value each year during the construction period.

9.
If the completed-contract method is used, what is the basis for determining the income to
be recognized in the second year of a three-year contract?
S, S & S
a.
Cumulative actual costs incurred only.
b.
Incremental cost for the second year only.
Difference
c.
Latest available estimated costs.
26.
In accounting for a long-term construction contract for which there is a projected profit, the
320.
d.
No income would be recognized in year 2.
S, S & Sbalance in the Construction in Progress account at the end of the first year of work using the percentage-ofcompletion method would be
321.
Anticipated Loss
zero.
16
322.
.
Felidae Co. uses the completed-contract method to account for a 4-year construction
the same as the completed-contract method.
contract that is currently in its third year. Progress billings were recorded and collected in the third year.
higher than the completed-contract method.
Based on events occurring in the third year, a loss is now anticipated on the contract. When will the effect of
d.
lower than the completed-contract method.
S, S & S
each of the following be reported in the companys income statement?
17
.
The percentage-of-completion and the completed-contract methods of accounting for
AICPA 0589 T-13
324.
a. 325.
b.
c.
d.
long-term
construction
projects in progress differ in that
Third-year Progress Billings Not third year
Not third year
Third year
Third year
It is only under the percentage-of-completion method that progress billings are accumulated in a
Anticipated Loss
Third year
Fourth year
Third year
Fourth year
contra-inventory account called billings on construction in progress.
It is only under the completed-contract method that accumulated construction costs are included in
338.
17.
Cost estimates at the end of the second year indicate a loss will result on completion of
a
construction
in progress inventory account.
the entire contract. Which of the following statements is correct?
Only
the
percentage-of-completion method recognizes all revenues and gross profit on the contract
a.
Under the completed-contract method, the loss is not recognized until the year the construction is
when
the
contract
is completed.
completed.
D.
It
is only under the percentage-of-completion method that gross profit earned to date is
b.
Under the percentage-of-completion method, the gross profit recognized in the first year must not
accumulated in the construction in progress inventory account.
CIA 0594 IV-26
be changed.
c.
Under the completed-contract method, when the billings exceed the accumulated costs, the
16.
Which of the following is not a difference between the percentage-of completion and
amount of the estimated loss is reported as a current liability.
completed-contract
methods of accounting for long-term construction contracts?
339.
d.
Under the completed-contract method, when the Construction in Process balance
They
report
different amounts for inventory during the construction period.
exceeds the billings, the estimated loss is added to the accumulated costs.
K, W & W
They report different amounts for progress billings during the construction period.
c.
They cause a different cash inflow during the construction period.
S, S & S
340.
PERCENTAGE-OF-COMPLETION VS. THE COMPLETED CONTRACT METHOD
d.
They report different amounts for accounts receivable during the construction period.
341.
Advantage of Percentage-of-Completion Method
342.
52.
The percentage-of-completion method is preferable to the completed contract method
Anticipated Loss
because it is a better measure of:
16.
Cost estimates on a long-term contract may indicate that a loss will result on completion of
343.
A.
Costs and completion rates.
C. Assets and equities.
the
entire
contract.
In this case, the entire expected loss should be
344.
B.
Receivables and inventory.
D. Effort and accomplishment.
S, S & T
recognized in the current period, regardless of whether the percentage-of-completion or
completed-contract method is employed.
345.
Similarities
recognized in the current period under the percentage-of-completion method, but the completed346.
20.
When comparing the percentage-of-completion and completed-contract methods of
contract
method
should defer recognition of the loss to the time when the contract is completed.
accounting for long-term construction contracts, both methods will report

c.

recognized in the current period under the completed-contract method, but the percentage-ofcompletion method should defer the loss until the contract is completed.
358.
d.
deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or completed-contract method is employed.
K, W & W

JOURNAL ENTRIES
FINANCIAL STATEMENT PRESENTATION & REQUIRED DISCLOSURES
Financial Statement Presentation
Progress billings and construction in process
20
359.
36.
When should an anticipated loss on a long-term contract be recognized under the
.
How should the balances of progress billings and construction in progress be shown at
percentage-of-completion method and the completed contract method, respectively?
reporting dates prior to the completion of a long-term contract?
Progress billings as deferred income, construction in progress as a deferred expense.
RPCPA 1082, 0593
Percentage-of-completion
362.
Completed Contract
Progress billings as income, construction in progress as inventory.
a.
Over life of the project
Completion of contract
Net, as a current asset if debit balance and current liability if credit balance.
b.
Immediately
Completion of contract
d.
Net, as income from construction if credit balance, and loss from construction if debit
c.
Over life of the project
Immediately
balance.
AICPA
1178
T-40
d.
Immediately
Immediately
Construction in Progress
.
An organization has a long-term construction contract in process. During the current
13.
How should earned but unbilled revenues at the balance sheet date on a long-term
period, the estimated total contract cost has increased sufficiently so that there is a current-period loss, even
construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?
though the contract is still estimated to be profitable overall. Under these circumstances, the [List A] method
As construction in progress in the current asset section of the balance sheet.
of revenue recognition would require a [List B] period adjustment of expected gross profit recognized on the
As construction in progress in the noncurrent asset section of the balance sheet.
As a receivable in the noncurrent asset section of the balance sheet.
contract. CIA 1195 IV-16
d.
In a note to the financial statements until the customer is formally billed for the portion of
377.
List A
378.
List B
work completed. K, W & W
A. Percentage-of-completion
Prior
B. Percentage-of-completion
Current
Required Disclosure
C. Completed-contract
Prior
Completed Contract Method
D. Completed-contract
Current
18.
If a company uses the completed-contract method of accounting for long-term
construction contracts, then during the period of construction, financial information related to a long-term
19
383.
.
During 1990, Tidal Co. began construction on a project scheduled for completion in 1992. contract will
At December 31, 1990, an overall loss was anticipated at contract completion. What would be the effect of
appear on both the income statement and balance sheet during the construction period.
the project on 1990 operating income under the percentage-of-completion method and the completedappear only on the income statement during the period of construction.
contract method?
appear only on the balance sheet during the period of construction.
AICPA 1191 T-5
a.
b.
c. 388.
d.
d.
not appear on the financial statements.
S, S & S
Percentage-of-completion
No effect
No effect
Decrease
Decrease
Completed-contract
No effect
Decrease
No effect
Decrease
375.

18

1.Answer (D) is correct. The revenue recognition principle states that revenue should be recognized (recorded) when
realized or realizable and earned. Revenue is earned when the earning process is essentially complete. In effect,
revenue is recorded when the most important event in the earning of that revenue has occurred. Thus, revenue is
normally recorded at the time of the sale or, occasionally, at the time cash is collected. However, sometimes neither the
sales basis nor the cash basis is appropriate, such as when a construction contract extends over several accounting
periods. As a result, contractors ordinarily recognize revenue using the percentage-of-completion method so that some
revenue is recognized each year over the life of the contract. Hence, this method is an exception to the general principle
of revenue recognition, primarily because it better matches revenues and expenses. Answer (A) is incorrect because the
percentage-of-completion method attempts to match revenues and expenses with the appropriate periods. Answer (B) is
incorrect because the going-concern assumption is appropriate for a contractor using the percentage-of-completion
method, as for any other type of company. Answer (C) is incorrect because the economic-entity assumption is
appropriate for a contractor using the percentage-of-completion method, as for any other type of company.

2.Answer (D) is correct. Revenue is recognized when realized or realizable and the earning process is substantially
complete. This ordinarily occurs at the time of sale and delivery of goods or services. Thus, the percentage-ofcompletion method is essentially an exception to the revenue recognition principle. Production rather than sale and
delivery is considered to be the culmination of the earning process. Answer (A) is incorrect because the percentage-ofcompletion method attempts a more accurate association of cost incurrence and revenue recognition. Answer (B) is
incorrect because the percentage-of-completion method is completely consistent with the going concern assumption.
Answer (C) is incorrect because the percentage-of-completion method is completely consistent with the historical cost
principle.

3.Answer (D) is correct. SFAC 5 states that revenue should be recognized when it is both realized or realizable and
earned. If a project is contracted for before production and covers a long time period in relation to reporting periods,
revenues may be recognized by a percentage-of-completion method as they are earned (as production occurs),
provided reasonable estimates of results at completion and reliable measures of progress are available. Thus,
contractors traditionally use the percentage-of-completion method because some revenue can be recognized during
each period of the production process. In a sense, the earning process is completed in various stages; thus, revenues
should be recorded in each stage. Answer (A) is incorrect because, depending upon the terms of the contract, the
assets may not be readily convertible into cash. Answer (B) is incorrect because, on a large construction project, the
production process often cannot be easily divided into definite stages. Answer (C) is incorrect because cash is
sometimes not received until the project is completed.
4.REQUIRED: The method appropriate to account for construction revenue.DISCUSSION: (B) SFAC 5, Recognition and

Measurement in Financial Statements of Business Enterprises, states that revenue should be recognized when it is both
realized or realizable and earned. If a project is contracted for before production and is long in relation to reporting
periods, revenues may be recognized by a percentage-of-completion method as they are earned (as production occurs),
provided reasonable estimates of results at completion and reliable measures of progress are available. This method
results in information that is more relevant and representationally faithful than that based on waiting for delivery,
completion of the project, or payment.
Answer (A) is incorrect because the installment method is appropriate if collectibility is doubtful. Answer (C) is incorrect
because the completed-contract method is appropriate if reasonable estimates of results at completion and reliable
measures of progress are not available. Answer (D) is incorrect because the point-of-sale method is appropriate when
the product or merchandise is delivered or services are rendered directly to customers.

5.Answer (B) is correct. Under the percentage-of-completion method, revenues and expenses are recognized based on
the stage of completion at the balance sheet date if the outcome of the contract can be estimated reliably. For a fixedprice contract, the outcome can be estimated reliably if (1) total revenue can be measured reliably, (2) it is probable that

the economic benefits of the contract will flow to the enterprise, (3) contract costs to complete and stage of completion
can be measured reliably, and (4) contract costs can be clearly identified and measured reliably so that actual and
estimated costs can be compared. Answer (A) is incorrect because revenue is not recognized until progress has been
made toward completion. Answer (C) is incorrect because the cash basis is inappropriate. An accrual method, that is,
the percentage-of-completion method, should be used. Answer (D) is incorrect because the completed-contract method
is not a permissible method.
6.REQUIRED: The reporting of the difference between construction in progress and progress billings.DISCUSSION:

(B) Progress billings is an offset to construction in progress (or vice versa) on the balance sheet. The difference
between construction in progress (costs and recognized income) and progress billings to date is shown as a current
asset if construction in progress exceeds total billings, and as a current liability if billings exceed construction in
progress. Because progress billings exceed construction in progress, the difference should be reported as a current
liability of $20,000 [$400,000 ($300,000 + $80,000)].
Answer (A) is incorrect because progress billings exceed construction in progress. Answers (C) and (D) are incorrect
because $100,000 ignores the revenue already recognized.
7.REQUIRED: The effect that progress billings and collections have on the determination of earnings.DISCUSSION:

Under GAAP, revenue should be recognized when it is realized or realizable and earned. For long-term construction
contracts, these criteria are met in accordance with either the percentage-of-completion method or the completedcontract method. Neither the issuance of a progress billing (debit accounts receivable, credit progress billings) nor the
collection of cash (debit cash, credit accounts receivable) results in recognition of income.
Answers (A), (B), and (D) are incorrect because neither progress billings nor collections on progress billings should be
used to calculate income.
8.REQUIRED: The item(s) used in computing income in the second year using the percentage-of-completion method.

DISCUSSION: (C) The percentage-of-completion method provides for the recognition of income based on the
relationship between the costs incurred to date and estimated total costs for the completion of the contract. The amount
of income (based on the latest available estimated costs) recognized in the second year of a 4-year contract is
calculated as follows: The total anticipated income is multiplied by the ratio of the costs incurred to date to the total
estimated costs, and the product is reduced by previously recognized income. Income previously recognized is
therefore used to calculated income to be recognized in the second year. However, progress billings to date have no
effect on the amount of income to be recognized in the second year.
Answers (A), (B), and (D) are incorrect because income previously recognized is used to calculate the income
recognized. Progress billings to date are not.
9.REQUIRED: The ratio used in the calculation of income recognized for a construction contract using the percentage-

of-completion method.DISCUSSION: (A) According to ARB 45, the percentage-of-completion method provides for the
recognition of income based on the relationship between costs incurred to date and estimated total costs for completion
of the contract. (But ARB 45 permits any other measure of progress as may be appropriate having due regard to work
performed.) The amount of income recognized in the 3rd period of a 5-year contract is calculated as follows: The total
anticipated income (based on the latest available estimated costs) is multiplied by the ratio of costs incurred to date to
the latest available total estimated costs, and the product is reduced by the previously recognized income.
Answer (B) is incorrect because the ratio of total costs incurred to date to total billings to date is not relevant. Answer
(C) is incorrect because total costs incurred must be used. Answer (D) is incorrect because neither the issuance nor the
collection of billings results in income recognition.
10.REQUIRED: The ratio used in the calculation of income recognized for a construction contract using the percentage-

of-completion method.DISCUSSION: (A) According to ARB 45, the percentage-of-completion method provides for the

recognition of income based on the relationship between costs incurred to date and estimated total costs for completion
of the contract. (But ARB 45 permits any other measure of progress as may be appropriate having due regard to work
performed.) The amount of income recognized in the third year of a 5-year contract is calculated as follows: The total
anticipated income (based on the latest available estimated cost) is multiplied by the ratio of costs incurred to date to the
latest available total estimated costs, and the product is reduced by previously recognize income.
Answer (B) is incorrect because the ratio of total costs incurred to date to total billings to date is not relevant. Answer
(C) is incorrect because total costs incurred must be used. Answer (D) is incorrect because neither the issuance nor the
collection of billings results in income recognition.
11.REQUIRED: The items used to calculate income in the last year of a contract using the percentage-of-completion

method.DISCUSSION: (A) The percentage-of-completion method recognizes revenues, costs, and income depending
on the progress made on the contract. Income recognized in the last year of the contract equals the contract price,
minus actual total costs, minus income previously recognized.
Answers (B), (C), and (D) are incorrect because income previously recognized and actual total costs are used.
12.(A)

Excess:

Costs + profits:
$1,150,000Billings:
$150,000

$800,000 + 350,000 =
1,000,000

13.Answer (D) is correct. According to the revenue recognition principle, revenue should be recognized when (1)
realized or realizable and (2) earned. Under the completed-contract method, revenue is not recognized until a long-term
construction contract is complete. At this stage, the entity is most clearly entitled to the resulting revenues and is most
likely to have been involved in an exchange. Answer (A) is incorrect because the percentage-of-completion method
allows for revenue to be recognized at various stages of the contract although the entire job is not complete. Answer (B)
is incorrect because, if the collectibility of assets is relatively uncertain, revenues and gains may be recognized as cash
is received using the installment sales method.
Answer (C) is incorrect because the completion-of-production method is an appropriate basis for recognition if products
or other assets are readily realizable, e.g., precious metals and some agricultural products.
14.REQUIRED: The effect of the completed-contract method on revenue recognition.DISCUSSION: (B) Under the

completed-contract method of accounting for long-term construction contracts, recorded progress billings have no effect
on the recognition of income.
Answers (A), (C), and (D) are incorrect because under the completed-contract method, progress billings are recorded
when issued and removed at the completion of the contract.
15.REQUIRED: The effect of progress billings on the recognition of revenue.DISCUSSION: (D) GAAP requires that

revenue be recognized when it is realized or realizable and earned. Under the completed-contract method, revenue
recognition is appropriate only at the completion of the contract. Neither the recording nor the collection of progress
billings affects this recognition.
Answers (A), (B), and (C) are incorrect because neither the issuance of a progress billing (debit accounts receivable,
credit progress billings) nor the collection of cash (debit cash, credit accounts receivable) results in recognition of
income.
16.REQUIRED: The

effect of progress billings and an anticipated loss on the companys income

statement.DISCUSSION: (A) Under the completed-contract method, the gross profit on the contract should be
recognized upon the completion of the contract. If a loss is anticipated, however, the loss should be recognized
immediately. Under GAAP, the entries to record progress billings and their collection do not affect the recognition of

profit or loss. Thus, the 3rd year progress billings have not effect on the income statement, but the loss anticipated in
the 3rd year should be recognized in full in that year.
Answers (B), (C), and (D) are incorrect because, under the completed-contract method, progress billings have not effect
on the recognition of income, and an anticipated loss should be recognized in the year it occurs.

17.Answer (D) is correct. The completed-contract method does not recognize any gross profit until the contract is
completed. The percentage-of-completion method recognizes a portion of revenues and gross profit each period, based
upon the ratio of costs incurred to date to total estimated costs of completion. Accumulated gross profit and accumulated
construction costs are included in the construction in progress inventory account under the percentage-of-completion
method. Answer (A) is incorrect because progress billings are accumulated in the billings on construction in progress
account under both methods. Answer (B) is incorrect because accumulated construction costs are included in the
construction in progress inventory account under both methods. Answer (C) is incorrect because the percentage-ofcompletion method recognizes a percentage of revenues and gross profit each period.

18.Answer (B) is correct. Under the percentage-of-completion method, a current-period loss on a profitable contract is
treated as a change in accounting estimate. Thus, a current-period adjustment is required. Prior-period adjustments are
made to correct errors, not to reflect changes in estimates. Answer (A) is incorrect because, under the percentage-ofcompletion method, a current-period loss on a profitable contract requires a current-period adjustment. Answer (C) is
incorrect because, under the completed-contract method, no profit is recognized until the contract is completed. Cost
estimate adjustments while construction is in progress do not result in profit or loss recognition prior to completion
unless an overall loss is expected on the contract. Answer (D) is incorrect because, under the completed-contract
method, no profit is recognized until the contract is completed. Cost estimate adjustments while construction is in
progress do not result in profit or loss recognition prior to completion unless an overall loss is expected on the contract.
19.REQUIRED: The effect of the project on 1990 operating income under the percentage-of-completion method and the

completed-contract method.DISCUSSION: (D) When the current estimate of total contract costs indicates a loss, an
immediate provision for the entire loss should be made regardless of method. Thus, under either method, 1990
operating income is decreased by the projected loss.
Answers (A), (B), and (C) are incorrect because, under either method, 1990 operating income is decreased by the
projected loss.
20.REQUIRED: The proper balance sheet presentation of progress billings and construction in progress.DISCUSSION:

(C) ARB 45, Long-Term Construction-Type Contracts, requires that the difference between construction in progress
(costs and recognized income) and progress billings to date be shown as a current asset if construction in progress
exceeds total billings, and as a current liability if billings exceed construction in progress. Separate recognition is
required for each project.
Answers (A) and (B) are incorrect because progress billings and construction in progress should be netted for balance
sheet presentation as a current asset or liability. Answer (D) is incorrect because neither income nor loss results from
progress billings.