(Long-Term Contract-Percentage-of-Complction) Widjaja Company is accounting for
ID: 2456276 • Letter: #
Question
(Long-Term Contract-Percentage-of-Complction) Widjaja Company is accounting for a long term construction contract using the percentage-of-completion method. It is .1 4-year contract that currently in its second year. The latest estimates of total contract costs indicate that the contract will be completed at a profit to Widjaja Company. Instructions What theoretical justification is there for Widjaja Company's use of the percentage-of-completion method? How would progress billings be accounted for? Include in your discussion the classification of progress billings in Widjaja Company financial statements. How would the income recognized in the second year of the 4-year contract be determined using the cost-to-cost method of determining percentage of completion? What would be the effect on earnings per share in the second year of the 4-year contract of using the percentage-of-completion method instead of the completed-contract method? Discuss. (AICPA adapted)Explanation / Answer
A) Widjaja company should recognise revenue in each period base upon progress because the right to revenue is established abd collectibility is reasonably assured. also this method avoids distortion if income from period to period and provides for better recognition of expenses with the related revenues.
B) Progress billings are accounted for by increasing progress billings on contract and increasing progress accounts recievable, a contra asset that is offset against the construction in process account. the two accounts will be shown net in the current assets section of the statement of financial position if the construction in process account exceeds the billings on construction in process account.If the billings on constrrcution in proces account the two accounts would be shown net in most cases in the current liabilitie section of the statement of financial position.
C)Cost to cost method - income recognised in the second year of the four year contract is as follows:
1) the estimated total income from the contract would be determined by deducting the estimated total costs of the contract( the actual costs to date plus the estimated cost to complete) from the contract price.
2) the actual cost to date would be divided by the estimated total costs of the contract to arrive at the percentage completed.this would be multiplied by the estimated total income from the contract to arrive at the total income recognisable to date.
3) The income recognise in the second year of the contract would be determined by deducing the income recognised in the first year of the contract from the total income recognisable to date.
d)earnings per share in the second year of the four year contract would be higher using the percentage of completion method of the cost recovery method because income would be recognised in the second year of the contract using th epercentage of completion method, whreas no income would be recognise in the second year of the contract using the cost recovery method.
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