Widjaja Company is accounting for a long-term construction contract using the 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 profit to Widjaja Company.
Answer the following questions in the Discussion Board:
- What theoretical justification is there for Widjaja Company’s use of the percentage-of-completion method?
- How would progress billings be accounted for? Include in your discussion the classification of progress billings in Widjaja Company financial statements.
- How would the income recognized in the second year of the 4-year contract be determined using the cost-to-cost method of determining percentage of completion?
- What would be the effect on earnings per share in the second year of the 4-year contract of using the percentage-of-completion method instead of the completed-contract method? Discuss.
Just do response each posted # 1 to 43 down below only
Good afternoon class and Prof.,
The justification for Widjaja Company using the percentage-of-completion method is simple, it is an accounting method used in long term contracts. The Widjaja Company is in a 4-year project and this for a construction project and it will work perfectly. Billing progress is used in long term projects so the Widjaja can bill to date of the completion of there project to support their operations throughout the project. The cost-to-cost method is part of the percentage-of-completion method and is used by accountants to see what percentage the job is done. To use the cost-to-cost method in the second year the Widjaja Company can determine how far long they are in the second year. By using the percentage-of-completion method instead of the completed-contract method will affect the earning per share by giving the investor a more accurate view of the profitable of the job at the two-year mark of a four-year job. (Kieso, D. E., Weygandt, J. J., Warfield, T. D., 2016)
The percentage-of-completion method is commonly used in calculating the ongoing recognition of revenue and expenses related to long-term projects based on the percentage of work completed. Since this project is a 4-year contract, it would be best to allocate revenue and expenses per year rather then use the completed contract method. This would only recognize the revenue at the completion of the contract and for the past 3 years the project would not show any revenue and would not show a true representation of the financial statements.
The progress billing is an invoice that is intended to obtain payment for the specific portion of a project that has been completed to date. The invoice includes the total contract amount, cumulative amount of progress billings to date, percentage of completion of the project, and total amount remaining to be billed. Progress billing is commonly used when projects are more than one year and needs funding to support operations.
When Widjaja Company sends out the invoice Widjaja would increase accounts receivable (Dr.) and increase progress billing (Cr.). Widjaja would report Progress billings and Construction in progress as current assets under the inventories section of the balance sheet. If billing on construction in progress were to surpass the construction in process account then you would have a net loss resulting in Widjaja reporting in the current liabilities portion of the balance sheet.
Finding the income for the second year of Widjaja Company’s construction contract using cost-to-cost method would go as follows:
Costs incurred to date / most recent estimate of total costs = Percent Complete
Percent complete x estimated total revenue = Revenue to be recognized to Date
Revenue to date – Revenue recognized in previous periods = Current-Period Revenue
The effect on earnings per share in the second year of the 4-year contract using the percentage-of completion method vs. the completed-contract method would be that earnings per share would increase due to the recognition of revenue in the second year. The completed-contract method no revenue would be recognized until the end of year 4 so earnings per share would be zero until the contract is done.
Hello Professor and Class,
a/ As we all have learned long-term contracts are the ones expect to be done in more than one accounting periods. When a company uses the percentage-of-completion method to recognize revenue, it estimates the completion contract by determining the cost incurred, the total costs, and estimated gross profit to figure out the revenue to be recognized in each accounting period. In other words, the company breaks down the percentage of revenues and expenses and records upon making progress and toward the completion of the project. Companies use this method to comply with GAAP’s revenue matching principle that revenue is recognized “when each performance obligation is satisfied” (Kieso, Weygant & Warfield, 2016, p. 981). Widjaja Company was in the second year of the 4-year contract, it should have already recorded the proportion of work completed for year 1 and recognized its profit in the financial statements. Then, continue to do so for the completed proportion in each remaining year.
b/ Progress billings simply are billing invoices in progress of the contract. A progress billing normally includes the paid amount-to-date and the remaining balance of the contract. The “progress billings” are accounted for as the contra account of the “construction in process”. Both report as the current asset and under the inventories section of the balance sheet. When the company bills its vendor, it records as an increase accounts receivable (Dr.) and also an increase of progress billings (Cr.).
c/ Widjaja recognized income in the second of the 4-year contract by following these steps.
- Figure out the annual cost incurred to date in year 2, including the cost incurred in year 1
- Add: Estimated costs to complete the contract by the end of year 2
- Divide: Cost to date of year 2 by the total estimated costs
Equal: Percent complete
- Multiply: Percent complete to the Total contract price
Equal: Revenue Recognized in year 2
- Subtract: Costs incurred in year 2
Equal: Profit (income) recognized in year 2
d/ The completed contract method of accounting recognizes revenue and expenses when the project is completed. Therefore, with the 4-year contract, revenue was not recognized in year 1, 2, or 3. With that said, the earnings per share (EPS) in the second year under the completed contract method would be zero while the EPS under the percentage-of-completion method would be higher due to the recognized income in the second year of the contract.