91Ó°ÊÓ

The contract can be defined as the agreement between the parties to complete obligations on their end. Such agreement between the parties is enforceable by law; therefore, they are charged with a penalty for non-completion.

The business entity must use the percentage-of-completion method for recognizing the contract’s revenue because this is the only method that will meet the criteria of recognizing revenue over the period.

Progress billing will be accounted for in the following manner:

1. Increasing the accounts receivable account.
2. Increasing the billing on the contract account.

Suppose the construction in the process account reports a higher amount than the billing on construction in the process. In that case,the difference between these two accounts will be reflected in the current asset section of the balance sheet.

If billing on the construction in the process is higher than the construction in process account, then their difference will be generally reported as current liabilities.

The income will be recognized using the cost-to-cost method as follow:

1. Firstly, the business entity will calculate the estimated income by using the contract price and estimated cost of the contract.
2. Secondly, the estimated cost incurred will be divided by the contract's total cost to determine the completion percentage.
3. In the third step, the business entity will determine the income recognized for the second year by deducting the income recognized in the first year from the income recognized up to date

The business entity will report higher earnings per share when the percentage-of-completion method is used instead of the complete contract method because it will recognize income in the second year when the percentage-of-completion method is used. It will not recognize any income when the complete contract method is used.