Podcast
Questions and Answers
What costs are recognized under a long-term construction contract for the seller creating an asset with no alternative use?
What costs are recognized under a long-term construction contract for the seller creating an asset with no alternative use?
- Depreciation of idle plant and equipment
- Costs of materials used in construction
- Costs of moving plant and equipment to the site (correct)
- Revenue recognized proportionally to performance obligation satisfied (correct)
Which method is NOT a recognized method for the recognition of costs in long-term construction contracts?
Which method is NOT a recognized method for the recognition of costs in long-term construction contracts?
- Cost-to-cost method
- Efforts expended method
- Direct measurement of output
- Incremental cost method (correct)
Which criteria must be met for efforts to be recognized as assets?
Which criteria must be met for efforts to be recognized as assets?
- Enhances liability
- Not recoverable
- Not exceeding total units
- Directly related to the contract (correct)
What should happen to incremental costs incurred if they are not obtained?
What should happen to incremental costs incurred if they are not obtained?
What method is used when it is not possible to reliably estimate the outcome of a contract?
What method is used when it is not possible to reliably estimate the outcome of a contract?
What is the purpose of the Construction in Progress (CIP) account?
What is the purpose of the Construction in Progress (CIP) account?
Which of the following costs is categorized as costs to fulfill a contract?
Which of the following costs is categorized as costs to fulfill a contract?
How is the cost recognized when using the cost-to-cost method?
How is the cost recognized when using the cost-to-cost method?
Which of the following could be considered output in the context of long-term construction contracts?
Which of the following could be considered output in the context of long-term construction contracts?
Under the Zero Profit Method, when is revenue recognized?
Under the Zero Profit Method, when is revenue recognized?
What is true about the costs related to the seller creating an asset with no alternative use?
What is true about the costs related to the seller creating an asset with no alternative use?
Which of the following is an output method in recognizing performance obligations under long-term contracts?
Which of the following is an output method in recognizing performance obligations under long-term contracts?
What type of standard can efforts expended fall within the scope of?
What type of standard can efforts expended fall within the scope of?
What should be added to the cost incurred to date if supplies are not yet used?
What should be added to the cost incurred to date if supplies are not yet used?
What should be done with costs of materials not used on any specific contract?
What should be done with costs of materials not used on any specific contract?
What is recognized in the Progress Billings account during long-term construction contracts?
What is recognized in the Progress Billings account during long-term construction contracts?
What type of contract is specifically negotiated for the construction of interrelated assets?
What type of contract is specifically negotiated for the construction of interrelated assets?
Which of the following is an example of a fixed price contract?
Which of the following is an example of a fixed price contract?
What kind of costs are directly related to long-term construction contracts?
What kind of costs are directly related to long-term construction contracts?
Which of the following is NOT typically included in the costs related to long-term construction contracts?
Which of the following is NOT typically included in the costs related to long-term construction contracts?
What does an escalation clause in a fixed price contract refer to?
What does an escalation clause in a fixed price contract refer to?
What is the amount recorded under Construction in Progress before any billings?
What is the amount recorded under Construction in Progress before any billings?
What is the total revenue recognized from construction activities?
What is the total revenue recognized from construction activities?
How much is recorded as Progress Billings in the accounts receivable?
How much is recorded as Progress Billings in the accounts receivable?
What amount represents the Contract Asset in the Balance Sheet?
What amount represents the Contract Asset in the Balance Sheet?
What is the amount recorded as Construction Expenses?
What is the amount recorded as Construction Expenses?
What is the amount recorded under Progress Billings in the Current Liability section?
What is the amount recorded under Progress Billings in the Current Liability section?
What is the amount that needs to be deducted from Construction in Progress for the Contract Liability?
What is the amount that needs to be deducted from Construction in Progress for the Contract Liability?
How is gross profit recognized in the Construction in Progress account?
How is gross profit recognized in the Construction in Progress account?
Which of the following amounts is NOT listed in the balance sheet?
Which of the following amounts is NOT listed in the balance sheet?
What is the net amount of the Contract Liability after accounting for Progress Billings?
What is the net amount of the Contract Liability after accounting for Progress Billings?
Revenue is recognized over time if which criterion is met?
Revenue is recognized over time if which criterion is met?
What is included in general costs attributable to a contract?
What is included in general costs attributable to a contract?
Which of the following is NOT a condition for recognizing revenue over time?
Which of the following is NOT a condition for recognizing revenue over time?
Which of the following represents an increase in costs associated with a contract?
Which of the following represents an increase in costs associated with a contract?
Which costs would typically be chargeable to the customer under contract terms?
Which costs would typically be chargeable to the customer under contract terms?
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 key concepts related to contract costs and long-term construction contracts (LTCC). It includes details on cost recognition, capitalization, and the criteria for asset recognition. Test your understanding of these essential principles in construction management.
