When there is a significant increase in the estimated total contract costs but the increase does not eliminate all profit on the contract, which of the following is correct?
A) Under both the percentage-of-completion and the completed-contract methods, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
B) Under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
C) Under the completed-contract method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
D) No current period adjustment is required.

Question

Quizplus · Accepted Answer

Under the percentage-of-completion method, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. This is because the percentage-of-completion method recognizes revenue and expenses based on the percentage of completion, and any change in estimated costs affects the calculation of the percentage of completion. This adjustment is not required under the completed-contract method because all revenue and expenses are recognized only when the contract is completed. No adjustment is required if the cost increase does not eliminate all profit on the contract.

When There Is a Significant Increase in the Estimated Total