Construction Contract Cost Analysis
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Construction Contract Cost Analysis

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@ImmaculateDiscernment

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Questions and Answers

Which costs are considered reimbursable under the contract?

  • Depreciation of idle equipment
  • Costs of materials used in construction (correct)
  • Cost of wasted materials
  • Revenue recognized from performance obligations

    • What criteria must be met for efforts to be recognized as assets?

  • Indirect benefits to stakeholders
  • Alternative uses identified
  • Proven increased market value
  • Directly related to the contract (correct)

    • What is the implication of a seller creating an asset with no alternative use?

  • The asset can be liquidated immediately
  • The asset is depreciated over time
  • The asset can be sold to another contractor
  • Expenses related to the asset cannot be recovered (correct)

    • What does the Recovery/Zero Profit Method imply about revenue recognition?

    <p>Revenue is recognized to the extent of costs incurred</p> Signup and view all the answers

    Which account is specifically used in long-term construction contracts?

    <p>Construction in Progress</p> Signup and view all the answers

    What method can be used for revenue recognition in long-term construction contracts?

    <p>Cost-to-cost method</p> Signup and view all the answers

    Which of the following is an example of incremental costs related to obtaining a contract?

    <p>Hiring costs for plant and equipment</p> Signup and view all the answers

    Which of the following represents an output method in contracts?

    <p>Output methods based on total output</p> Signup and view all the answers

    What should be done with supplies that are not yet used but can provide alternative value?

    <p>Add to costs incurred to date if no alternative use exists</p> Signup and view all the answers

    Which method of revenue recognition allows for recognizing revenue based on efforts expended?

    <p>Cost-to-cost method</p> Signup and view all the answers

    When is an effort recognized as recoverable?

    <p>When it generates or enhances an asset</p> Signup and view all the answers

    Which expense is typically not reimbursable under long-term construction contracts?

    <p>Depreciation of idle plant and equipment</p> Signup and view all the answers

    In which situation would it be appropriate to use the Recovery/Zero Profit Method?

    <p>When it is not possible to reliably estimate the contract outcome</p> Signup and view all the answers

    What is a characteristic of costs that fulfill a contract?

    <p>They are directly related to contract performance</p> Signup and view all the answers

    In the input method for revenue recognition, which of the following is accepted?

    <p>Total expected costs against costs incurred</p> Signup and view all the answers

    Which account would not typically be used in accounting for long-term construction contracts?

    <p>General Ledger Balance</p> Signup and view all the answers

    What is the primary purpose of a long-term construction contract?

    <p>To construct a substantial asset or a combination of assets</p> Signup and view all the answers

    Which of the following is NOT a type of construction contract mentioned?

    <p>Joint venture contract</p> Signup and view all the answers

    What costs are included in the design and technical assistance for construction contracts?

    <p>Estimated costs for rectification and warranty</p> Signup and view all the answers

    What is a characteristic feature of fixed price contracts?

    <p>They specify a fixed rate per output</p> Signup and view all the answers

    Which of the following statements about escalation clauses is correct?

    <p>They allow for adjustments in contract price</p> Signup and view all the answers

    When is revenue recognized at a point in time?

    <p>At the end of the contract term.</p> Signup and view all the answers

    What criterion allows for revenue to be recognized over time?

    <p>The customer controls the asset as it is improved.</p> Signup and view all the answers

    Which of the following is NOT considered a general cost attributable to a contract?

    <p>Research and development costs.</p> Signup and view all the answers

    What can lead to penalties affecting contract revenues?

    <p>Agreed variations decreasing the contract amount.</p> Signup and view all the answers

    Which of the following costs is chargeable to the customer under contract terms?

    <p>General administration costs if reimbursable under the contract.</p> Signup and view all the answers

    What is the amount recorded under Construction in Progress when assuming the total costs incurred is $500?

    <p>$500</p> Signup and view all the answers

    Which account is credited when costs are incurred in a construction project?

    <p>Contract Account</p> Signup and view all the answers

    What amount is recognized as gross profit in the Construction in Progress account when total revenue is $700?

    <p>$200</p> Signup and view all the answers

    What is the total amount of Accounts Receivable recorded for progress billings amounting to $650?

    <p>$650</p> Signup and view all the answers

    When progress billings exceed Construction in Progress, what section of the Balance Sheet does this appear in?

    <p>Current Liabilities</p> Signup and view all the answers

    If the progress billings amount is $760, what is the total Contract Liability on the Balance Sheet?

    <p>$60</p> Signup and view all the answers

    What is the net amount recognized as Contract Asset when Construction in Progress is $700 and Progress Billings is $650?

    <p>$50</p> Signup and view all the answers

    What does the amount of $200 under Construction in Progress denote?

    <p>Recognized gross profit</p> Signup and view all the answers

    In which account is the revenue from construction recorded when the total is $700?

    <p>Revenue from Construction</p> Signup and view all the answers

    What would the total amounts to be deducted from Current Assets when calculating net Contract Asset?

    <p>$650</p> Signup and view all the answers

    Study Notes

    Contract Costs

    • Contracts to create assets without alternative use are reimbursable under specific conditions.
    • Site labor costs and material usage in construction are key components of contract costs.
    • Depreciation applies to idle equipment and any plant or equipment not tied to a specific contract.
    • Costs incurred for moving equipment and materials to and from job sites are also included.

    Long-Term Construction Contracts (LTCC)

    • Incremental costs should be capitalized when obtaining contracts unless they are expensed.
    • Costs directly related to fulfilling a contract may be recognized as assets if certain conditions are met.
    • Criteria for asset recognition include being directly related to the contract, enhancing the asset, and being recoverable.

    Recognition Methods

    • Revenue from LTCC can be recognized using either input or output methods, depending on the contract specifics.
    • Input methods include cost-to-cost and efforts expended (evaluating labor hours and materials used).
    • Output methods are based on direct measurements of value transferred, such as milestones or units produced.
    • Recognizing revenue at the point in time may apply when reliable outcome estimation of the contract isn't possible.

    Journal Entries in LTCC

    • Key accounts used in journal entries include Construction in Progress (CIP), Progress Billings, and Contract Account.
    • Typical entries include recording incurred costs, recognizing gross profit in the CIP account, and billing customers for progress.

    Types of Construction Contracts

    • Fixed-price contracts provide a set price per output and include potential escalation clauses for cost increases.
    • Cost-plus contracts allow for fees in addition to direct costs (both variable and fixed).
    • Design and technical assistance costs associated with contracts may involve rectification estimates and warranty costs.

    Contract Revenues

    • Contract revenues include the total consideration receivable and adjustments for variations and cost escalations.
    • Revenue recognition occurs over time if specific criteria are met, such as customer consumption of benefits and control over assets being created.
    • General overhead and administrative costs may be chargeable under contract terms if reimbursable.

    General Costs and Considerations

    • Costs related to insurance and other general administration may need to be clarified in contract terms to determine reimbursement.
    • Research and development costs can be included if specifically reimbursable under the contract provisions.

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    Description

    This quiz covers essential concepts related to construction contracts, focusing on reimbursable costs, site labor expenses, and asset creation without alternative use. Test your understanding of the components that influence project costing and financial management in construction.

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