Cost estimates at the end of the second year indicate a loss will result on completion of the entire contract. Which of the following statements is correct?
A) Under the completed-contract method, the loss is not recognized until the year the construction is completed.
B) Under the percentage-of-completion method, the gross profit recognized in the first year must not be changed.
C) Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability.
D) Under the completed-contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs.

Question

Quizplus · Accepted Answer

Under the completed-contract method, when it becomes apparent that a loss will be incurred on the contract, the entire estimated loss is recognized immediately, regardless of the progress of the work. This is because accounting principles require that losses be recognized as soon as they are foreseeable. Therefore, when billings exceed accumulated costs, indicating a loss, this loss is reported as a current liability to reflect the obligation to cover the loss.

Cost Estimates at the End of the Second Year Indicate