Concept explainers
Revenue recognized point of long term contract
A long-term contract qualifies for revenue recognition over time. The seller can recognize the revenue as per percentage of the completion of the project, which is recognized as revenue minus cost of completion until date.
If a contract does not meet the performance obligation norm, then the seller cannot recognize the revenue till the project is complete.
The revenue recognition principle
The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.
To explain: The manner in which IFRS and GAAP methods affect revenue recognition, cost of construction, and gross profit over the life of a profitable contract.
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INTERMEDIATE ACCOUNTING
- When it is probable that total contract costs will exceed total contract revenue, how shall it be accounted for? Group of answer choices The expected loss shall be recognized as an expense immediately only when the outcome of a construction contract cannot be estimated reliably. The expected loss shall be recognized as an expense immediately regardless of the certainty or uncertainty of the outcome of a construction contract. The expected loss shall be accounted for based on company’s policy. The expected loss shall be recognized as an expense by reference to the state of completion of the contract activity at the end of the reporting period when the outcome of a construction contract cannot be estimated reliably. PreviousNextarrow_forward1. When outcome of a construction contract is estimated reliably, contract revenue and contract costs associated with the construction contract should be recognized using * A. cost recovery method B. percentage of completion method C.gross profit method D.zero profit method.arrow_forwardWhich of the following statements regarding the recognition of expenses related to long-term contracts under IFRS is true? A: General and administrative expenses are normally recognized as an asset. B: The cost of wasted resources of an abnormally high amount are recognized as an asset until the performance obligation has been met. C: If capitalized costs are no longer expected to be recovered through the contract, a portion of contract revenue should be reversed. D: Costs that will be reimbursed by the customer are recognized as an asset.arrow_forward
- When the outcome of a construction contract cannot be estimated reliably, how shall contract revenue and contract costs associated with the construction contract be recognized? Group of answer choices They shall be recognized as revenue and expenses respectively by reference to the state of completion of the contract activity at the end of the reporting period also known as by percentage of completion method. They shall be recognized as revenue and expenses respectively by the date of earning of revenue or incurring of expenses also known as accrual method. They shall be recognized as revenue and expenses respectively by reference to the percentage of collection of receivables from customers also known as by installment method. Revenue shall be recognized only to the extent of contract cost incurred that is probable will be recoverable and the contract cost shall be recognized as an expense in the period in which there are incurred also known as cost recovery or zero-profit…arrow_forwardThis revenue recognition method usually applies to long-term construction contracts where the amount of revenue recognized is related to the progress of the work completed. O Franchise agreement O Installment method O Percentage-of-completion method O Consignment methodarrow_forwardI need the answer quicklyarrow_forward
- The cost-plus approach: a. refers to contracts that are modified from their original terms during the course of the contract. b. refers to contracts where the contractor is not expected to recover all costs incurred in completing the project. c. is not allowed under ASC Topic 606 guidance for revenue recognition. d. uses an assumed reasonable profit margin to determine the stand-alone price.arrow_forwardExplain how to Determining Whether a Contract Exists for Revenue Recognition Purposes.arrow_forward33. Entity A enter into a long-term contract to provide service. The outcome of the transaction can be estimated reliably and the progress on the contract can be measured with sufficient reliability. According to PPSAS, how should entity A recognize revenue from the contract? On a straight-line basis over the contract term By reference to the stage of completion of the contract at the reporting date Full recognition of contract price upon completion of the contract Only to the extent of costs that are expected to be recovered.arrow_forward
- Which of the following statements is true regarding contracts in ASC Topic 606 guidance for revenue recognition? Contracts need to be legally enforceable to be considered under ASC Topic 606. Contracts need to be in written form to be considered under ASC Topic 606. No consideration can be received before a contract exists. No price concessions can be made to an existing contract.arrow_forwardWhich of the following costs shall from part of contract costs of long-term construction contract? a. General administration costs for which reimbursement is not specified in the contract b. Research and development costs for which reimbursement is not specified in the contract c. Construction overheads including costs such as the preparation and processing of construction personnel payroll. d. Selling costs such as broker’s commissionarrow_forwardThis is under construction contracts in accounting for special transactions subjectarrow_forward
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