Answered: ACCOUNTING RULES Remember the news…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

News story quiz chapter 2 · ACCOUNTING RULES Remember the news story at the beginning of chapter 2? Go back to that story and reread it before answering the following questions. This news story deals with two companies (Capita and W S Atkins) both of whom are involved in the construction industry. If a contract takes longer than one year to complete, at what point should the company take any expected profit? A prudent approach would be to wait until the contract has finished. A highly imprudent one would be to take all the expected profit when the contract was signed. The accountancy profession’s answer is to take some profit on account provided certain conditions are met. Question: In which accounting period should a construction company take the profit on a contract: (a) when the contract is signed; (b) apportioned over the life of the contract; (c) when the contract is completed; (d) when the warranty period is over; (e) when it is clear a profit will be made?

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