Question 1: What are the two basic methods of accounting for long-term construction contracts? What circumstances determine when one or the other of these methods should be used?
Question 2: For what reasons should the percentage-of-completion method be used over the completed-contract method whenever possible?
Question 3: On March 1, 2010, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,400,000. The building was completed by October 31, 2012. The annual contract cost incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2010, 2011, and 2012 are given below.
2010 2011 2012
Contract costs incurred during the year $2,880,000 $2,230,000 $2,190,000
Estimated costs to complete the contract 3,520,000 2,190,000 -0-
at 12/31
Billings to Fabrik during the year 3,200,000 3,500,000 1,700,000
Instructions:
(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. (Ignore income taxes.)
(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. (Ignore income taxes.)