Distinguish between percentage-of-completion and completed-contract methods in construction accounting.

Distinguish between percentage-of-completion and completed-contract methods in construction accounting.

• A. Percentage-of-completion defers all revenue until project completion.
• B. Completed-contract recognizes revenue as costs are incurred.
• C. Percentage-of-completion recognizes revenue and gross profit as work progresses based on costs incurred relative to total estimated costs; completed-contract defers all revenue and profit until project completion.
• D. Both methods recognize revenue evenly across time regardless of costs.

Answer: (C)

In long-term construction contracts, revenue recognition can happen over time or be deferred until the job is finished. The percentage-of-completion method records revenue and gross profit as the work progresses, based on the costs incurred relative to the total estimated costs (the cost-to-cost method). This approach matches revenue with the work actually performed and the associated costs in each period, producing a timely and ongoing sense of profitability. The completed-contract method, on the other hand, defers all revenue and profit until the project is completed, with costs accumulated in work-in-progress until that point. That makes the chosen statement correct: it accurately describes how percent-of-completion recognizes revenue and gross profit as work progresses based on costs incurred relative to total estimated costs, while completed-contract defers all revenue and profit until project completion. Why the other descriptions don’t fit: one option suggests that percentage-of-completion defers revenue until project completion, which is the opposite of how it works. Another claims that the completed-contract method recognizes revenue as costs are incurred, which it does not. A final option says both methods recognize revenue evenly over time regardless of costs, which isn’t true—the completed-contract method defers, and percentage-of-completion recognizes revenue in proportion to progress.

In long-term construction contracts, revenue recognition can happen over time or be deferred until the job is finished. The percentage-of-completion method records revenue and gross profit as the work progresses, based on the costs incurred relative to the total estimated costs (the cost-to-cost method). This approach matches revenue with the work actually performed and the associated costs in each period, producing a timely and ongoing sense of profitability. The completed-contract method, on the other hand, defers all revenue and profit until the project is completed, with costs accumulated in work-in-progress until that point.

That makes the chosen statement correct: it accurately describes how percent-of-completion recognizes revenue and gross profit as work progresses based on costs incurred relative to total estimated costs, while completed-contract defers all revenue and profit until project completion.

Why the other descriptions don’t fit: one option suggests that percentage-of-completion defers revenue until project completion, which is the opposite of how it works. Another claims that the completed-contract method recognizes revenue as costs are incurred, which it does not. A final option says both methods recognize revenue evenly over time regardless of costs, which isn’t true—the completed-contract method defers, and percentage-of-completion recognizes revenue in proportion to progress.