Principles of Financial Accounting · free preview
Revenue Recognition for Long-Term Projects
Long-term contracts use either the over-time method, which recognizes revenue as work progresses toward control transfer, or the point-in-time method when control transfers only at completion, and the choice changes both the income statement and the balance sheet of every reporting period.
1. When projects span years
When projects span years
2. Over-time recognition with cost-to-cost progress
Over-time recognition with cost-to-cost progress
3. Point-in-time alternative and contract balances
Point-in-time alternative and contract balances
4. Estimation risk
Estimation risk
5. Over-time condition
When must revenue on a long-term contract be recognized over time rather than at completion?
6. Cost-to-cost progress
A contract is priced at 5,000,000 dollars. Estimated total cost is 4,000,000 dollars and cost incurred to date is 1,000,000 dollars. Using cost-to-cost progress, how much revenue is recognized to date?
7. Contract asset meaning
On a long-term project, cumulative recognized revenue of 2,600,000 dollars exceeds billings of 2,000,000 dollars. What does the 600,000 dollar difference represent on the balance sheet?
8. Why billing does not drive revenue
Why does percentage-of-completion accounting measure progress with costs rather than with billings?
9. Progress percentage
Cost incurred is 1,000,000 dollars against estimated total cost of 4,000,000 dollars. Compute the percentage of completion as a whole number.
10. Contract asset balance
Recognized revenue to date is 2,600,000 dollars and billings to date are 2,000,000 dollars. Compute the contract asset in dollars, number only.
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