Question

When work to be done and costs to be incurred on a long-term contract can be estimated

dependably, which of the following methods of revenue recognition is preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these

Answer 1

The percentage-of-completion method is preferable for revenue recognition when costs and work on a long-term contract can be dependably estimated, as it matches revenue with the period work is performed and provides a realistic view of financial performance.Thus the correct option b.

Step-by-step explanation:

When the work to be done and costs to be incurred on a long-term contract can be estimated dependably, the preferable method of revenue recognition is the percentage-of-completion method. This method allows revenue and expenses to be recognized as the contract progresses, and it reflects the economic substance of the transaction by matching revenue with the period in which the work is performed. It provides a more realistic view of the company's performance and financial position than other methods, such as the installment-sales method or the completed-contract method, which may delay recognition of revenue and expenses until certain events occur.