Question:
Distinguish between the percentage-of-completion and completed contract methods of accounting for
long-term contracts with respect to income recognition. Under what circumstances should a company use
the completed contract method?
Answer:
The completed contract method of recognizing revenues and costs on long-term construction contracts is
equivalent to recognizing revenue at point of delivery, i.e., when the construction project is complete. The
percentage-of-completion method assigns a fair share of the project’s expected revenues and costs to each
period in which the earnings process takes place, i.e., the construction period. The “fair share” typically is
estimated as the project's costs incurred each period as a percentage of the project's total estimated costs.
The completed contract method should only be used when the lack of dependable estimates or inherent
hazards cause forecasts of future costs to be doubtful.
Distinguish between the percentage-of-completion and completed contract methods of accounting for
long-term contracts with respect to income recognition. Under what circumstances should a company use
the completed contract method?
Answer:
The completed contract method of recognizing revenues and costs on long-term construction contracts is
equivalent to recognizing revenue at point of delivery, i.e., when the construction project is complete. The
percentage-of-completion method assigns a fair share of the project’s expected revenues and costs to each
period in which the earnings process takes place, i.e., the construction period. The “fair share” typically is
estimated as the project's costs incurred each period as a percentage of the project's total estimated costs.
The completed contract method should only be used when the lack of dependable estimates or inherent
hazards cause forecasts of future costs to be doubtful.
