Chapter 6 Smart Book (Optional) Long-term Construction Contracts

If a contract qualifies for revenue recognition over time, the income statement for each year reports related: (Select all that apply.) cost of construction construction in progress revenue

cost of construction

Select all that apply 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. (Select all that apply.) credit construction in progress $850,000 credit progress billings $850,000 debit cost of construction $850,000 credit construction in progress $50,000 credit revenue from long-term contracts $800,000

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

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: debiting loss from construction crediting cost of construction crediting construction in progress debiting construction in progress

crediting construction in progress

Which of the following conditions or situations make the timing of revenue recognition for long-term contracts especially critical? (Select all that apply.) There tends to be a considerable difference between recognition over time and when the performance obligation is completed. In most cases, the project is of little value until completed. 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. Delayed recognition doesn't provide information to financial statement users in a timely manner.

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

True Reason: Most are viewed as single performance obligations because a single bundled product or service is delivered.

In which account is a loss from long-term contracts recorded? Construction in progress Accounts receivable Billings on construction contracts Revenue from long-term contracts

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? Cash Billings on contracts Accounts receivable Construction in progress

Construction in progress

The construction in progress account represents the total construction costs (labor, material, overhead) and the amounts paid by customers to date. gross profit recognized to date. total revenue for the contract term.

gross profit recognized to date.

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. completed contract method percent of completion method output method.

input method.

Estimates relating to long-term contracts must be periodically updated. are determined only at the beginning of the contract period. remain unchanged until any related uncertainty is resolved. may be revised only if a overall loss is indicated.

must be periodically updated.

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 agreement outlined in contract. billings to date on contract. progress toward completion.

progress toward completion.

A shortcoming of the output method for estimating progress toward completion is that it may only be accurate for heterogeneous projects not provide information on a timely basis provide a distorted view of actual completion

provide a distorted view of actual completion

The billings on construction account represents the gross profit recognized to date. the amount of revenues recognized to date. the cost of construction to date. the amount billed to customers to date.

the amount billed to customers to date.

Revenue is recognized upon completion of a long-term contract if: the contract does not qualify for revenue recognition over time it better reflects the underlying economic substance of the contract the seller chooses to apply this method

the contract does not qualify for revenue recognition over time

When revenue is recognized upon completion of a long-term contract, CIP is updated to include gross profit when the customer pays. periodically each period. when the customer is billed. upon completion.

upon completion.

The amount billed to customers on long-term construction project is recorded in the billings on construction account. construction in progress account. accounts receivable account.

billings on construction account.

The billings on construction account is a contra account to accounts receivable. cost of goods sold. construction in progress. sales.

construction in progress.

At the end of the period, if construction in progress is less than billings on construction contracts, it is recorded as a(n) contract liability. revenue. contract asset. expense.

contract liability.

Estimates relating to long-term contracts remain unchanged until any related uncertainty is resolved. must be periodically updated. may be revised only if a overall loss is indicated. are determined only at the beginning of the contract period.

must be periodically updated.

On the balance sheet, billings on construction is netted against accounts receivable added to CIP added to accounts receivable netted against CIP

netted against CIP

For many years, long-term contracts that qualified for recognition over time were accounted for using an approach called the ________ method, and those that did not qualify for recognition over time used a method called _________. completed contract; percentage-of-completion percentage-of-completion; completed contract billings in progress; deferred recognition

percentage-of-completion; completed contract

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 $5 million $2 million $1.2 million

$1.5 million Reason: ($1.2 mill/3 mill) x (5 mill) - $500,000

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. Actual costs incurred during the third year were $1.2 million. For year 3, Jones should recognize a loss of: $100,000 $0 $200,000

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

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: Costs incurred to date Year 1 $200,000 Year 2 $315,000 Year 3 $800,000 Estimated costs to complete Year 1 300,000 Year 2 385,000 Year 3 0 Progress billings Year 1 250,000 Year 2 250,000 Year 3 500,000 Linx recognized $200,000 of gross profit during year 1. What is the gross profit or loss recognized in year 2? . $135,000 gross profit $180,000 gross profit $65,000 loss $20,000 loss

$65,000 loss

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 $60,000 $300,000 $100,000 $500,000

$75,000 Reason: Revenue Recognized = (Cost Incurred to date/Estimated total costs) * contract price.

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 a different period than when it creates a financial asset. A long-term contract creates a physical asset in the same period it creates a financial asset. Long-term contract accounting "double counts" assets.

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

Why are estimated losses on an entire long-term project fully recognized in the first period the loss is anticipated? Construction in progress should be measured consistent with measuring inventory at the higher of its cost or market value. Construction in progress would be valued at an amount less than the company expects to realize from the contract. Construction in progress would be valued at an amount greater than the company expects to realize from the contract.

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

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 Debit billings on construction and debit accounts receivable; credit revenue from long-term contracts Debit cost of construction; credit revenue from long-term contracts Debit billings on construction contract; credit construction in progress

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

What is the impact of a loss on long-term construction projects on the construction in progress account? Increase No effect Decrease

Decrease

Which of the following prevents double-counting of assets for a long-term construction contract? Netting of billings and accounts receivable Recognizing both a physical asset (CIP) and a financial asset (billings) Netting of CIP and billings on construction contract

Netting of CIP and billings on construction contract