Summary Advanced Accounting: Long-Term Construction

Items that affect Contract Price and Revenue:

1. Variations - either increase or decrease the Contract Price.
2. Incentives - increases the Contract Price.
3. Penalties - decreases the Contract Price.

Recognition of Profits:

1. Point in time - for completed contracts.
2. Overtime
a. Progress is reasonably measurable = Percentage of Completion
• Input - Cost to cost
• Output
1. Units
2. Architect’s Estimate
b. Progress is not reliably measurable
- Zero Profit Approach: Revenue = Cost

Use Overtime recognition if one of the conditions are met:

1. The customer simultaneously receives and consumes the benefit provided by the entity’s
performance.
2. The entity’s performance creates or enhances an asset that the customer controls as the asset is
created or enhanced.
3. The entity’s performance does not create an asset with an alternative use to the entity and the
entity has enforceable rights to payment for performance completed to date.

Costs xx
Gross Profit xx
Gross Loss (xx)
Construction in Progress (CIP) xx

If no Gross Loss, % of Completion = CIP / Contract Price

Progress Billings (PB):
Accounts Receivable xx
Progress Billings xx

At the end of the contract:

1. CIP = PB
2. Closing Entry:
Progress Billings xx
Construction in Progress xx

*Any loss arising from the contract will be recognized immediately.