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Chapter 18: Q9CA_1 (page 1048)

WRITING (Long-Term Contract鈥擯ercentage-of-Completion) Widjaja Company is accounting for a long-term construction contract using the percentage-of-completion method. It is a 4-year contract that is 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

(a) What theoretical justification is there for Widjaja Company鈥檚 use of the percentage-of-completion method?

Short Answer

Expert verified

The business entity can use the percentage of completion method for recognizing revenue becausethe business entity is qualified for reporting revenue over a period of time.

Step by step solution

01

Definition of Long-Term Contract

A contract that does not end in one fiscal period or a contract that goes on for more than one year is known as a long-term contract.

02

Justification for the use ofthe percentage of completion method

The company is accounting for a long-term contract that will continue for four years, and also, the company qualifies for reporting revenue over time. Therefore, the company can use the percentage of completion method for recognizing revenue.

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Most popular questions from this chapter

On May 1, 2017, Mount Company enters into a contract to transfer a product to Eric Company on September 30, 2017. It is agreed that Eric will pay the full price of $25,000 in advance on June 15, 2017. Eric pays on June 15, 2017, and Mount delivers the product on September 30, 2017. Prepare the journal entries required for Mount in 2017.

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Instructions

(a) Prepare the appropriate journal entries for December 31, 2017, and December 31, 2018.

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Franchise Fee, Initial Down Payment) On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Campbell Inc. for an initial franchise fee of \(50,000. The amount of \)10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of \(8,000 each, beginning January 1, 2018. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2017. Lesley Benjamin鈥檚 credit rating indicates that she can borrow money at 11% for a loan of this type.

Instructions

(a) Prepare journal entries for Campbell for 2017-related revenue for this franchise arrangement.

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