Chapter 10

Chapter 10
TRUE
 In general, companies recognize revenue at the point of sale because that is when the
performance obligation is satisfied.
 If a company projects a loss on the contract prior to completion, the full amount of the loss
should be recognized immediately in a cost recovery method, resulting in a write-down of the
asset to its estimated net realizable value.
 Any costs incurred which relate to future activity should be recognized as an asset if it is
probable that they will be recovered, and be recorded as Construction in Progress.
 Construction materials purchased several weeks or months before they are actually used in
constructions should not be treated as costs incurred for purposes of computing the percentage
of completion ratio until the materials have been physically used in production.
 Under the percentage of completion method, the balance of Construction in Progress account is
closed to the Contract Billings account which have the same balance.
 A loss in the current period on a profitable contract must be recognized under the percentage of
completion method and not under the cost recovery method.
FALSE
 Efforts-expended methods are output measures used to measure the earnings process.
 The loss on a profitable contract shall be recorded in the period in which the loss is incurred
under the cost recovery method.
 The procedures in recognizing revenue has an impact or effect to the recognition and recording
of progress billings.
 The procedures in recognizing revenue has an impact or effect to the recognition and recording
of progress billings.
 Under the cost recovery method, the “Construction in Progress” account is debited every year
for the costs incurred and gross profit earned each year.
 PAS # 26 “Construction Contracts” requires that when a loss is anticipated, the loss is reported
in its entirety immediately when the loss is first anticipated for percentage of completion only.
 As construction contract estimates change, retroactive adjustments are required if the amount
is material.
 Input measures are made in terms of results achieved and include surveys of work performed
and physical proportion of the work completed.
 Companies must recognize a loss on an unprofitable contract under the percentage-of
completion method but not the cost-recovery method.
MCQ
Which of the following is true about accounting for long-term construction contracts? - Contract assets
are likely to be larger if revenue is recognized over time than if revenue is recognized at a point in
time
With respect to delaying revenue recognition until completion of a long-term contract, it is the case
that: - Estimated losses on the overall contract are recognized before the contract is completed.
Which of the following is not true about revenue recognition with respect to long-term construction
contracts - Long-term construction contracts typically include multiple performance obligations
because of all the different types of goods and services included for each project.
Identification
 Cost-to-cost method - The most popular input measure of which the degree of completion is
determined by comparing costs already incurred with the most recent estimates of total
expected costs to complete the project.
 Contract asset - Comprises of total costs incurred on the contract less progress billings.
 Progress billings - At the completion of the contract, this account is exactly equal to the
Construction in Progress amount which reflects the total contract price.
 Fixed price contract - A type of construction contract which is subject to cost escalation
clauses.
 Percentage of completion - This is computed by dividing the cost incurred to date by the
total estimated cost to complete the project.
 Contract retention - Guarantees the completion of the contract of which part of the billings
may be withheld.
 Asset - Construction in Progress account is a/an __________.
 Claim - An amount that the contractor seeks to collect from the customer as reimbursement
for costs not included in the contract price.
 Contract liability - Comprised of progress billings less total costs incurred on the contract,
plus cumulative recognized profit or less cumulative recognized loss.
 Change in accounting estimate - Under PAS 8, the effect of any change of contract brought
about by change orders regarding revenue or costs or the outcome of a contract is accounts for
as a
 Proportion of contract cost incurred - The other term for cost-to-cost method.
 Anticipated contract losses on a unprofitable contract - A condition that arises when the
estimates at the end of the current period may indicate that a loss will result on completion of
the entire contract.
 Current asset - The contract retention account is presented in the Statement of Financial
Position as a
 Variation - An instruction by the customer for a change in the scope of the work to be
performed under the contract.
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