Question

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.

Answer 1

Answer, B. under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess profit recognized on the project in prior periods.

Since only under percentage-of-completion method tje profit is recognized on percentage basis and when there is a change in estimated cost, it will cause change in percentage of completion of the contract in that year and will accordingly impact gross profit of that year which will be adjusted for prior year profits being recognized.