Question

Widjaja Company is accounting for a long-term construction contract using percentage-of-completion method. It is a 4-year contract that is currently in its second year. The latest estimates of total contract costs indicate that the contract will be completed at a loss to Widjaja Company.

a. What theoretical justification is there for Widjaja Company's use of the percentage-of-completion method?

b. How would the company account for the projected loss?

Answer 1

Answer :

a. The justification for Widjaja company to use the percentage of completion method to account their long term construction contract is that:

1) The contract completion is calculated on the basis of Cost incurred and Expected costs to complete the contract.

2) The contract completion is available at each stage of the project.

3) The total cost of contract completion is known to the management.

4) The billing and gross profits are being calculated on the basis of percentage of completion method.

=====

b) The company would account for the projected loss because

i) The cost incurred is not properly computed and accounted.

ii) The estimated cost yet to finish the contract is mis-calculated.

iii) The price quoted for the contract is not correctly projected.

=====================================