Question

Companies must recognize the entire expected loss on an unprofitable contract in the current period under the percentage-of-completion method but not the completed-contract method.

a)True
b)False

Answer 1

The claim is false. In the percentage-of-completion method, expected losses are recognized when they become evident, not necessarily in the current period, whereas under the completed-contract method, losses are recognized at the end of the project or when they become apparent.

Step-by-step explanation:

The statement is false. Under the percentage-of-completion method, a company indeed recognizes revenue and expenses as the project progresses, which is based on the contract's stage of completion. However, it is not required to recognize the entire expected loss in the current period. Instead, if at any point, the project is expected to incur a loss, the entire estimated loss should be recognized immediately. The completed-contract method, on the other hand, defers all revenue, expenses, and profits until the project is substantially completed. Therefore, under the completed-contract method, expected losses would not be recognized until the contract is finished, or if it becomes evident that a loss is expected, at that point the loss is fully recognized.