Contract Costs and LTCC Overview

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Questions and Answers

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?

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?

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?

Expensed immediately Signup and view all the answers

What method is used when it is not possible to reliably estimate the outcome of a contract?

Zero Profit Method Signup and view all the answers

What is the purpose of the Construction in Progress (CIP) account?

To track incurred costs on projects Signup and view all the answers

Which of the following costs is categorized as costs to fulfill a contract?

Site labor costs and supervision Signup and view all the answers

How is the cost recognized when using the cost-to-cost method?

Cost incurred to date over total expected costs Signup and view all the answers

Which of the following could be considered output in the context of long-term construction contracts?

Milestones achieved Signup and view all the answers

Under the Zero Profit Method, when is revenue recognized?

Only to the extent of costs incurred Signup and view all the answers

What is true about the costs related to the seller creating an asset with no alternative use?

They can include costs related to satisfied purchase orders. Signup and view all the answers

Which of the following is an output method in recognizing performance obligations under long-term contracts?

Direct measurements of value Signup and view all the answers

What type of standard can efforts expended fall within the scope of?

Other recognized standards Signup and view all the answers

What should be added to the cost incurred to date if supplies are not yet used?

Costs associated with alternative uses Signup and view all the answers

What should be done with costs of materials not used on any specific contract?

Expensed immediately Signup and view all the answers

What is recognized in the Progress Billings account during long-term construction contracts?

Billings made to clients Signup and view all the answers

What type of contract is specifically negotiated for the construction of interrelated assets?

Long-term construction contract Signup and view all the answers

Which of the following is an example of a fixed price contract?

Fixed price or fixed rate per output Signup and view all the answers

What kind of costs are directly related to long-term construction contracts?

Design and technical assistance costs Signup and view all the answers

Which of the following is NOT typically included in the costs related to long-term construction contracts?

Advertising expenses Signup and view all the answers

What does an escalation clause in a fixed price contract refer to?

A clause allowing increases based on cost overruns Signup and view all the answers

What is the amount recorded under Construction in Progress before any billings?

$500 Signup and view all the answers

What is the total revenue recognized from construction activities?

$700 Signup and view all the answers

How much is recorded as Progress Billings in the accounts receivable?

$650 Signup and view all the answers

What amount represents the Contract Asset in the Balance Sheet?

$50 Signup and view all the answers

What is the amount recorded as Construction Expenses?

$500 Signup and view all the answers

What is the amount recorded under Progress Billings in the Current Liability section?

$760 Signup and view all the answers

What is the amount that needs to be deducted from Construction in Progress for the Contract Liability?

$700 Signup and view all the answers

How is gross profit recognized in the Construction in Progress account?

By subtracting expenses from revenue Signup and view all the answers

Which of the following amounts is NOT listed in the balance sheet?

Cash Signup and view all the answers

What is the net amount of the Contract Liability after accounting for Progress Billings?

$60 Signup and view all the answers

Revenue is recognized over time if which criterion is met?

The customer consumes the benefit of the seller's work as it is performed. Signup and view all the answers

What is included in general costs attributable to a contract?

Insurance premiums for the construction site. Signup and view all the answers

Which of the following is NOT a condition for recognizing revenue over time?

The seller implements a full refund policy. Signup and view all the answers

Which of the following represents an increase in costs associated with a contract?

Agreed variation for additional work. Signup and view all the answers

Which costs would typically be chargeable to the customer under contract terms?

Research and development costs, if reimbursable. 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 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.