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Chapter 18: Q35Q. (page 1032)

For what reasons should the percentage-of-completion method be used over the completed-contract method whenever possible?

Short Answer

Expert verified

The percentage-of-completion method is used to calculate income, representing the production effort more accurately. Income is recognized regularly depending on the proportion of the project completed, rather than simply when the entire assignment is completed.

Step by step solution

01

Meaning of Percentage-of-Completion

The percentage-of-completion method tracksrevenues, expenditures, and gross profit as a company nears the end of a long-term contract. Deferring recognition of these items till the conclusion of the contract distorts the accounting periods' efforts (costs) and accomplishments (revenues).

A corporation must have some foundation or standard for gauging progress toward completion at specific intermediate dates to use the percentage-of-complete technique.

02

Use of percentage-of-completion

Income is provided using the percentage-of-completion technique, which reflects the manufacturing effort more properly. Rather than only when the full task is finished, income is recognized regularly based on the proportion of the job accomplished. The main problem of the completed-contract technique is that it may cause earnings to be distorted since no attempt is made to represent current performance when the contract duration spans many accounting periods.

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Most popular questions from this chapter

Shaw Company sells goods that cost \(300,000 to Ricard Company for \)410,000 on January 2, 2017. The sales price includes an installation fee, which has a standalone selling price of \(40,000. The standalone selling price of the goods is \)370,000. The installation is considered a separate performance obligation and is expected to take 6 months to complete.

Instructions

(a) Prepare the journal entries (if any) to record the sale on January 2, 2017.

Manual Company sells goods to Nolan Company during 2017. It offers Nolan the following rebates based on total sales to Nolan. If total sales to Nolan are 10,000 units, it will grant a rebate of 2%. If it sells up to 20,000 units, it will grant a rebate of 4%. If it sells up to 30,000 units, it will grant a rebate of 6%. In the first quarter of the year, Manual sells 11,000 units to Nolan at a sales price of $110,000. Manual, based on past experience, has sold over 40,000 units to Nolan, and these sales normally take place in the third quarter of the year. What amount of revenue should Manual report for the sale of the 11,000 units in the first quarter of the year?

What are the two types of losses that can become evident in accounting for long-term contracts? What is the nature of each type of loss? How is each type accounted for?

How should a franchisor account for continuing franchise fees and routine sales of equipment and supplies to franchisees?

(Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct the path for \(200,000. In addition, as part of the contract, a performance bonus of \)40,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs , that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late.

Instructions

(a) Determine the transaction price that Concrete Always should compute for this agreement.

(b) Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this project on time. Assuming that he now believes that the probability for completing the project on time is 90% and otherwise it will be finished 1 week late, determine the transaction price.
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