CH 6: Revenue Recognition Pt 3

When revenue is recognized upon completion of a long-term contract, gross profit is recognized upon completion in which account?

Construction in progress

Related to long-term construction contracts, at the end of the period which accounts are netted?

Construction in progress and billings on construction contracts.

Why are estimated losses on an entire long-term project fully recognized in the first period the loss is anticipated?

Construction in progress would be valued at an amount greater than the company expects to realize from the contract.

Which of the following costs must be excluded from the calculation of the cost-to-cost ratio?

Inefficiencies related to the project Costs that don't reflect progress toward completion

True or false: Updated estimates related to contracts for which revenue was recognized during prior periods may necessitate recognition of losses.

True

The amount billed to customers on long-term construction project is recorded in the

billings on construction account.

If a contract qualifies for revenue recognition over time, revenue is recognized based on progress toward

completion

In which account is a loss from long-term contracts recorded?

construction in progress

The billings on construction account is a contra account to

construction in progress

When recognizing revenue over time, which account is updated for gross profit each period?

construction in progress

When revenue is recognized on long-term construction projects, a journal entry is recorded to recognize revenue and cost of goods sold. The difference between revenue and cost of goods sold (gross profit) is recognized in which account?

construction in progress

The billings on construction contract account is classified as a(n)

contra asset

At the end of the period, if construction in progress exceeds billings on construction contracts, it is recorded as a(n)

contract asset

If a contract qualifies for revenue recognition over time, the income statement for each year reports related:

cost of construction revenue

Which of the following are included in the journal entry required to record construction costs for a long-term construction contract?

debit construction in progress credit raw materials

At the end of a long-term construction project, the amounts in the construction in progress account will be ______ the billings on construction contract.

equal to

When revenue is recognized over time in a long-term contract, a loss may have to be recognized in at least one period

even if the project as a whole is expected to be profitable.

True or false: If a project qualifies for revenue recognition over time and the project as a whole is expected to be profitable, a loss should not ever be recognized in a given period along the way.

false

Estimated losses on the entire long-term project are recognized immediately because otherwise the CIP account would be valued at an amount ______ the amount the company expects to realize on the contract.

greater than

When recognizing revenue over the term of the contract, CIP is updated each period for the current year's

gross profit

The construction in progress account represents the total construction costs (labor, material, overhead) and

gross profit recognized to date.

For a contract that qualifies for revenue recognition over time, revenue and cost of construction are reported in the

income statement

Progress toward completion can be measured based on the proportion of effort expended thus far relative to the total effort expected to satisfy a performance obligation. This is referred to as a(n)

input method

The construction-in-progress account most closely relates to which type of account?

inventory

Which of the following can be used as indicators of progress toward completion under the input method?

labor hours expended costs incurred machine hours used

Typical costs included in a construction project include

labor, materials, and overhead

Estimates relating to long-term contracts

must be periodically updated.

On the balance sheet, billings on construction is

netted against CIP

If the seller provides a product or service that is customized by the customer and for which the seller has no alternative use, the seller should probably recognize revenue

over time

The essential difference between revenue recognition over time and upon completion relates to the

pattern of recognition of the related gross profit.

Revenue recognized each period is determined by multiplying total estimated revenue by

percentage completed to date and subtracting revenue recognized in prior periods

The amount of revenue that is recognized each period for a long-term contract that qualifies for revenue recognition over time is determined based on

progress toward completion

A shortcoming of the output method for estimating progress toward completion is that it may

provide a distorted view of actual completion

The billings on construction account represents

the amount billed to customers to date.

What is the difference between journal entries to recognize gross profits when revenue is recognized over time and when revenue is recognized upon completion of a long-term project?

timing

The journal entries used to recognize the costs of long-term construction contracts are identical when revenue is recognized upon completion and when it is recognized over time; however the two methods differ with respect

to the timing of revenue recognition.

True or false: An estimated overall loss on a long-term contract is fully recognized in the first period the loss becomes evident, regardless of the revenue recognition method used.

true

True or false: Most long-term contracts qualify for revenue recognition over time.

true

True or false: Most long-term contracts should be viewed as single performance obligations.

true

True or false: Recognized losses on long-term contracts reduce the construction in progress account.

true

True or false: The account descriptions used in the journal entry to close out the billings and construction in progress accounts are the same whether revenue is recognized upon completion or over time.

true

If a long-term contract doesn't qualify for revenue recognition over time, revenue is recognized ______.

upon completion

When revenue is recognized upon completion of a long-term contract, CIP is updated to include gross profit

upon completion

The construction in progress account is equivalent to which account in a manufacturing environment?

work-in-process

Ronin Corp. recognizes revenue over time related to a long-term contract. The contract price is $5,000,000, total expected construction costs are $3,000,000, and actual costs incurred during the first year are $300,000. Actual costs for year 2 are $900,000 and estimated cost to complete is $1,800,000. The amount of previously recognized revenue is $500,000. Revenue recognized for year 2 is:

$1.5 million

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. For year one, Jones recognizes $1 million of revenue and $800,000 of cost. During year 2, Jones incurs $1.2 million in cost and estimates that during year 3 an additional $1.1 million will be necessary to complete the project. Actual costs incurred during the third year were $1.2 million. For year 3, Jones should recognize a loss of:

$100,000 Reason: the additional costs for year 3 over the estimated costs represent an additional loss

Kline Corp. recognizes revenue over time to account for long-term contracts. The contract price is $5 million total construction costs are $3.75 million and actual cost incurred during the first year are $1.5 million. Calculate the revenue recognized during year 1.

$2 million

Lorna Corp. recognizes revenue over time for long-term contracts. At the date the contract is signed, the contract price is $600,000 and the expected costs to complete the contract are $400,000. The following information is available: Year 1 Year 2 Year 3 Costs incurred to date $100,000 $300,000 $500,000 Estimated costs to complete 300,000 200,000 0 Progress billings 200,000 200,000 200,000 What is the amount of revenue recognized during year 2?

$210,000 Reason: The cost-to-cost ratio for year 2 is $300,000/$500,000 = 60%. $600,000 x 60% = 360,000 -150,000= 210,000

Megan Corp. recognizes revenue over time to account for long-term contracts. At the date the contract is signed, the price is $600,000 and the expected costs to complete the contract are $400,000. The following information is available: Year 1 Year 2 Year 3 Costs incurred to date $200,000 $350,000 $500,000 Estimated costs to complete 200,000 150,000 0 Progress billings 200,000 200,000 200,000 What is the amount of gross profit or loss that is recognized in year 2?

$30,000 loss Reason: In year 1, the project is 50% complete and the expected total gross profit is $200,000. The company would have recognized $100,000 of gross profit in year 1. In year 2, the project is 70% complete and the expected total gross profit is reduced to $100,000. A total of $70,000 gross profit should be recognized at the end of year 2. $100,000 was recognized in year 1 so a $30,000 loss is recognized in year 2. $100,000 year 1 gross profit less $30,000 loss = $70,000 gross profit to date.

Linx Corp. recognizes revenue over time to account for long-term construction contracts. The contract price is $1,000,000 and the estimated costs to complete the project are $500,000 on the date the contract was signed. Linx subsequently has the following information: Year 1 Year 2 Year 3 Costs incurred to date $200,000 $315,000 $800,000 Estimated costs to complete 300,000 385,000 0 Progress billings 250,000 250,000 500,000 Linx recognized $200,000 of gross profit during year 1. What is the gross profit or loss recognized in year 2?

$65,000 loss Reason: In year 1, the project is 40% complete and the expected total gross profit is $500,000. The company would have recognized $200,000 of gross profit in year 1. In year 2, the project is 45% complete and the expected total gross profit is reduced to $300,000. A total of $135,000 gross profit ($300,000 x 45%) should be recognized at the end of year 2. $200,000 was recognized in year 1 so a $65,000 loss is recognized in year 2. $200,000 year 1 gross profit less $65,000 loss = $135,000 gross profit to date.

Rice Corp. recognizes revenue over time to account for long-term contracts and has the following information for the first year of the contract: Contract price $500,000 Total expected costs on contract 400,000 Costs incurred in current year 60,000 Costs incurred in previous years 0 What is the amount of revenue recognized in year 1?

$75,000 Reason: The cost-to-cost ratio is $60,000/$400,000 = 15%. Multiply 15% (the percentage completed) by the total contract price of $500,000 = $75,000 revenue

To date, Gunter Construction completed 89% of a construction project with a contract price of $1 million. Consistent with the contract provisions, at this time, Gunter may bill 80% of the agreed-upon price. Gunter will report an accounts receivable of

$800,000

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. For year one, Jones recognizes $1 million of revenue and $800,000 of cost. During year 2, Jones incurs $1.2 million in cost and estimates that during year 3 an additional $1.1 million will be necessary to complete the project. For year 2, Jones will recognize revenue of: (round to whole percent)

$950,000 Reason: cost-to-cost ratio: ($2mil/$3.1 mil) = 65% complete. x $3mil, less $1 mil previously recognized

What is a key difference in accounting for a long-term contract and for a typical sale?

A long-term contract creates a physical asset in the same period it creates a financial asset.

Which of the following methods of estimating progress toward completion represent output-type measures?

Achievement of milestones Number of units produced or delivered Appraisal of performance completed to date

What is the journal entry to recognize gross profit when revenue is recognized upon completion of a long-term construction project?

Debit Construction in Progress and Debit Cost of Construction; Credit Revenue from Long-Term Contracts

When is a loss recognized on a long-term contract?

In the first period in which the loss become evident.

What is the correct journal entry to recognize profit for a long-term construction project for which revenue is recognized over time?

Debit construction in progress and debit cost of construction; credit revenue from long-term contracts

Which of the following conditions or situations make the timing of revenue recognition for long-term contracts especially critical?

Delayed recognition doesn't provide information to financial statement users in a timely manner. There tends to be a considerable difference between recognition over time and when the performance obligation is completed.

Southland Construction. has entered into a three year contract to construct an office plaza for Northville Company for $300,000,000. Southland agrees to bill Northville 50% at the end of the first year, 30% at the end of the second year, and 20% at the end of the third year. At the end of year 1, Southland estimates it has completed 35% of the building and has incurred $55 million in construction costs. Which of the following is the correct entry to record billings for Southland Construction?

Dr. Accounts receivable $150 million; Cr. Billings on construction contract $150 million

What is the journal entry to recognize a loss on a long-term contract?

Dr. Cost of construction; Cr. Revenue from long-term contracts, Cr. Construction in progress (CIP)

What is the journal entry to recognize a loss on long-term contracts?

Dr: Cost of Construction; Cr: Revenue from Long-Term Contracts and Cr: Construction in Progress

Munch Inc. delivers various types of construction materials to a customer's building site. Over an 18-month period, Munch's employees utilize Munch's machinery and tools to construct a new office building for the customer. Munch identifies only one performance obligation related to this contract because

Munch combines the materials, labor, and use of machinery and tools to construct a single complete building.

Which of the following prevents double-counting of assets for a long-term construction contract?

Netting of CIP and billings on construction contract

Which of the following will not differ between revenue recognized over time and revenue recognized at completion?

Total revenue Total profit Total expense

If construction in progress is greater than billings on construction, the company reports the net amount as

a contract asset

Which of the following likely would qualify for revenue recognition over time?

a long-term construction contract

Which of the following are included in the journal entry required to record the collection of cash from a customer related to a long-term construction contract?

credit accounts receivable debit cash

The closing entry for a long-term construction project when revenue is recognized either over time or upon completion includes which of the following?

credit construction in progress debit billings on construction contract

Malone Corp. properly recognizes revenue upon completion of a long-term construction project. Malone has the following information for a 3-year contract. Year 1 Year 2 Year 3 Billings on contracts 10,000 10,000 30,000 Construction costs 8,000 8,000 8,000 The journal entry required at the end of the contract to recognize revenue and expenses will include

credit revenue from contracts $50,000. debit construction in progress $26,000. debit cost of construction $24,000.

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. For year one, Jones recognizes $1 million of revenue and $800,000 of cost. During year 2, Jones incurs $1.2 million in cost and estimates that during year 3 an additional $1.1 million will be necessary to complete the project. Jones will recognize a loss on the project by:

crediting construction in progress

When revenue related to a long-term construction contract is recognized over time, the journal entry to recognize revenue includes which of the following?

debit cost of construction debit construction in progress credit revenue from long-term contracts

Jackson Corp. recognizes revenue over time to account for long-term construction contracts. In year 3, Jackson anticipates a loss on the contract for $50,000. In year 3, Jackson recognizes revenues of $800,000 and has $850,000 in construction costs. Indicate which of the following are included in the journal entry at year-end to recognize revenues and profit/loss on the contract.

debit cost of construction $850,000 credit revenue from long-term contracts $800,000 credit construction in progress $50,000

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. The contract does not qualify for revenue recognition over time. During year 2, Jones estimates that it will incur a loss on the project. For year 2, Jones should:

debit loss on long-term contract credit construction in progress

Which of the following costs are included in a long-term construction contract?

direct material overhead direct labor

When the billings on construction contract is netted against the construction in progress account, this prevents

double counting of assets.

The formula: total estimated revenue times percentage completed to date less revenue recognized in prior periods is used to measure:

revenue recognized for the current period

On a long-term construction project, the amount in the construction in progress account represents the costs of construction plus the gross profit recognized to date, and the billings on construction represents

the amounts billed to the customer.

Revenue is recognized upon completion of a long-term contract if:

the contract does not qualify for revenue recognition over time

As compared to revenue recognition over time, the total amount of gross profit recognized related to revenue upon completion is:

the same

Which of the following differs between revenue recognized over time and revenue recognized at completion?

the timing of recognition