Final answer:
Losses on profitable long-term contracts are recognized immediately under both the completed-contract method and the percentage-of-completion method. The immediate recognition ensures the financial statements reflect the current financial condition accurately.
Step-by-step explanation:
The question pertains to accounting practices for recognizing losses on long-term contracts. When a loss is incurred on a long-term contract that has been profitable overall, the accounting treatment differs based on the accounting method used. Under the completed-contract method, revenues, expenses, and profits are recognized when the contract is fully completed. In contrast, the percentage-of-completion method records income and expenses based on the progress of the contract.
The correct answer to the student's question is: a. Recognized under both the completed-contract method and the percentage-of-completion method. This is because when a loss is foreseeable on a contract, it is recognized immediately under both methods, regardless of the overall profitability of the contract. It is important to recognize the loss as soon as it's evident, to present a true and fair view of the company's financial status.