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

Answer 1

Under the completed-contract method, when cost estimates indicate a loss on project completion, the loss is recognized immediately and if billings exceed the accumulated costs, a current liability is reported for the estimated loss. Under the percentage-of-completion method, losses are recognized in the period they become evident.

Step-by-step explanation:

When cost estimates at the end of the second year indicate that a loss will result on completion of the entire contract, accounting treatment for the loss differs based on the revenue recognition method being used. Under the completed-contract method, a loss is generally recognized immediately when it becomes evident.

The correct statement is:

• 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.

This is because when a loss is anticipated on a contract, the entire loss is recognized immediately, regardless of the billings. This results in a liability, as the estimated cost to complete the project exceeds the contract revenue. In contrast, under the percentage-of-completion method, losses are recognized in the periods they become evident, affecting the gross profit recognized in the first year and any other year before the contract is completed.