Question:
Two accounting students were discussing the alternative methods of accounting for long-term
construction contracts. The discussion focused on which method was most like the typical revenue
recognition method of recognizing revenue at point of product delivery. Bill argued that the completed
contract method was preferable because it was analogous to recognizing revenue at the point of delivery.
John disagreed and supported the percentage-of-completion method, stating that it was analogous to
accruing revenue during the earnings process, that is, as the work was performed.
Required:
Discuss the arguments made by both students. Which argument do you support? Why?
Answer:
Bill’s argument is that the completed contract method is preferable because it is analogous to point of
delivery revenue recognition. That is, no revenue is recognized until the completed product is delivered.
John’s argument is that the important factor is the earnings process and that revenue should be recognized
as the process takes place.
John’s argument is correct. In situations when the earnings process takes place over long periods of time,
like long-term construction contracts, it is preferable to recognize revenue during the earnings process,
rather than to wait until the process is complete.
Two accounting students were discussing the alternative methods of accounting for long-term
construction contracts. The discussion focused on which method was most like the typical revenue
recognition method of recognizing revenue at point of product delivery. Bill argued that the completed
contract method was preferable because it was analogous to recognizing revenue at the point of delivery.
John disagreed and supported the percentage-of-completion method, stating that it was analogous to
accruing revenue during the earnings process, that is, as the work was performed.
Required:
Discuss the arguments made by both students. Which argument do you support? Why?
Answer:
Bill’s argument is that the completed contract method is preferable because it is analogous to point of
delivery revenue recognition. That is, no revenue is recognized until the completed product is delivered.
John’s argument is that the important factor is the earnings process and that revenue should be recognized
as the process takes place.
John’s argument is correct. In situations when the earnings process takes place over long periods of time,
like long-term construction contracts, it is preferable to recognize revenue during the earnings process,
rather than to wait until the process is complete.
