Question

If construction in progress is greater than billings on construction, the company reports the net amount as

Answer 1

When Construction in Progress exceeds billings on construction, the difference is reported as a balance sheet asset, specifically as 'Costs and Estimated Earnings in Excess of Billings.'

Step-by-step explanation:

When a company is engaged in long-term construction contracts, the accounting for such contracts is often performed under the percentage-of-completion method. Under this method, revenue is recognized over time, proportionally to the degree of completion of the project. A common scenario faced in this accounting method involves Construction in Progress (CIP) being greater than billings on construction.

If the CIP value exceeds the amount billed to the customer, the difference is reported as an asset on the balance sheet. The specific line item is typically referred to as 'Costs and Estimated Earnings in Excess of Billings', indicating that the company has incurred costs and may have recorded earnings that it has not yet billed to the customer. This is a form of unbilled receivable.

Here's a step-by-step explanation:

1. Determine the total costs incurred to date for the construction project.
2. Calculate the earnings by applying the percentage-of-completion to the total estimated revenue from the contract.
3. Subtract the total billings to date from the sum of costs and estimated earnings to determine the net amount.

If this result is positive, which is the case when CIP > billings, the company reflects this net amount on the balance sheet as an asset. Conversely, if billings were greater than CIP and earnings, the company would classify the net amount as a liability, typically under 'Billings in Excess of Costs and Estimated Earnings'.