When the percentage-of-completion method of accounting for long-term construction projects is used,why is Construction in Progress increased by the annual recognized gross profit on long-term construction contracts?
A) The cost of the contract has increased.
B) The project's value has increased above cost.
C) The economy experiences inflation over the construction period.
D) Construction in Progress is not increased by the annual recognized profit.

Question

Quizplus · Accepted Answer

Under the percentage-of-completion method of accounting, the Construction in Progress account is increased each year by the annual recognized gross profit on long-term construction contracts. This is because the Construction in Progress account represents the value of the project at its current stage of completion, and the recognized gross profit represents the increase in value of the project that has been earned during the year. Therefore, Choice B is correct - the project's value has increased above cost. The other choices are incorrect - the cost of the contract may or may not have increased, inflation is not the reason for the increase in Construction in Progress, and the annual recognized profit is in fact used to increase Construction in Progress.

When the Percentage-Of-Completion Method of Accounting for Long-Term Construction Projects