The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it
A) is unacceptable for income tax purposes.
B) gives results based upon estimates which may be subject to considerable uncertainty.
C) is likely to assign a small amount of revenue to a period during which much revenue was actually earned.
D) None of these answers are correct.

Question

Quizplus · Accepted Answer

The percentage-of-completion method relies heavily on estimates, which may not always be accurate and may lead to considerable uncertainty in recognizing revenue. This can cause problems if estimates are revised later on, leading to a restatement of financial statements. Therefore, this is the principal disadvantage of using the percentage-of-completion method. A is incorrect as the method is acceptable for income tax purposes. C is incorrect as the method is designed to recognize revenue over the duration of the project based on estimates of the work completed.

The Principal Disadvantage of Using the Percentage-Of-Completion Method of Recognizing