Question

Cost estimates at the end of the second year indicate a loss will result on completion of the entire contract. Which of the following statements is correct?

a. Under the completed-contract method, the loss is not recognized until the year the
construction is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first
year must not be changed.
c. Under the completed-contract method, when the billings exceed the accumulated
costs, the amount of the estimated loss is reported as a current liability.
d. Under the completed-contract method, when the Construction in Process balance
exceeds the billings, the estimated loss is added to the accumulated costs.

Answer 1

The correct statement is (c). Under the completed-contract method, when billings exceed accumulated costs, the estimated loss is reported as a current liability, and not recognized until the contract is completed.

Step-by-step explanation:

When cost estimates at the end of the second year indicate a loss on the completion of a contract, there are different implications depending on the accounting method used. With the completed-contract method, a loss is not recognized until the project is completed, therefore statements (a) and (c) could be plausible. However, under the percentage-of-completion method, if a loss is anticipated, it must be fully recognized immediately, disagreeing with statement (b). For the completed-contract method, when billings exceed accumulated costs, the loss is recognized as a current liability, making statement (c) correct. This means that the amount of the estimated loss is reported as a current liability rather than being added to the accumulated costs, as suggested in statement (d).